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1. As compared to a cash dividend, a share repurchase will do which of the follo

ID: 2627096 • Letter: 1

Question

1. As compared to a cash dividend, a share repurchase will do which of the following?

a. Increase both earnings per share and the PE ratio

b. Not affect either the earnings per share nor the PE ratio

c. Not affect the earnings per share but will decrease the PE ratio

d. Increase the earnings per share and decrease the PE ratio

e. Increase the earnings per share but not affect the PE ratio

2. Delta Cabinets has 13,000 shares of stock outstanding at a market price of $19 a share. The earnings per share are $1.34. The firm has current assets of $49,000, net fixed assets of $220,000, and total liabilities of $187,000. Today, the firm is paying a cash dividend of $.40 a share. Ignore taxes. After the dividend, the firm's:

a. book value per share will be $6.31.

b. price-earnings ratio will be 13.88.

c. shareholder value per share will be $18.60.

d. stock price will be $19.00.

e. earnings per share will be $.94.

Explanation / Answer

As compared to a cash dividend, a share repurchase will do which of the following?

CORRECT ANSWER : e. Increase the earnings per share but not affect the PE ratio

The basic reason behind this is that repurchases reduces no of shares, so EPS will iincrease, but as no other change has taken place in company's fundamentals, P/E will remain same. which will increase market price per share.

so only above option is true

2. Delta Cabinets has 13,000 shares of stock outstanding at a market price of $19 a share. The earnings per share are $1.34. The firm has current assets of $49,000, net fixed assets of $220,000, and total liabilities of $187,000. Today, the firm is paying a cash dividend of $.40 a share. Ignore taxes. After the dividend, the firm's:

CORRECT ANSWER :c. shareholder value per share will be $18.60.

ACCORDING TO MM APPROACH, The price per share will exactly decrease by the amount of dividend per share.

current market price - dividend per share = $19 - $0.40 = $18.60

After the payment of dividend, book value will decrease but will not affect EPS or P/E ratio, as they are not dependent on dividend. so only correct answer is as written above

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