Galles Corporation is evaluating an extra dividend versus a share repurchase. In
ID: 2655782 • Letter: G
Question
Galles Corporation is evaluating an extra dividend versus a share repurchase. In either case, $16,000 would be spent. Current earnings are $1.60 per share, and the stock currently sells for $64 per share. There are 5,000 shares outstanding. Ignore taxes and other imperfections.
Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth per share. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)
What will the company's EPS and P/E ratio be under the two different scenarios? (Do not round intermediate calculations. Round your final answers to 2 decimal places, e.g., 32.16.)
Galles Corporation is evaluating an extra dividend versus a share repurchase. In either case, $16,000 would be spent. Current earnings are $1.60 per share, and the stock currently sells for $64 per share. There are 5,000 shares outstanding. Ignore taxes and other imperfections.
Explanation / Answer
Alternative 1 : If the company makes a dividend payment
Dividend per share = Earnings / No of shares outstanding = $16,000/5,000 shares = $3.20
Price per share = MPS - DPS = $64 - $3.20 = $60.80
Share holders wealth = MPS + DPS = $60.80+$3.20 = $64.00
EPS = $1.60
P/E RATIO = MPS/EPS = $60.80/$1.60 = 38
MPS = Market price per share
DPS =Dividend per share
Alternative 2 : If the company makes Repurcahse
Shares repurchased =Earnings / MPS = $16,000/$64 = 250 shares
If the shareholder lets their shares be repurchased, they will have $64 in cash. If the shareholder keepstheir shares, they’re still worth $64.
Price per share = $64
Share holders wealth = $64
If the company repurchases stock, the number of shares will decrease.
EPS = (EPS*No.of shares outstanding before repurchase) / No.of shares outstanding after repurchase
EPS = ( $1.60 * 5000shares) / (5000 - 200)shares
EPS = $1.67
P/E RATIO = MPS/EPS = $64/$1.67 = 38.32
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