Stock Repurchase. Flashback Corporation is evaluating an extra dividend versus a

Question

Stock Repurchase. Flashback Corporation is evaluating an extra dividend versus a share repurchase. In either case, $16,320 would be spent. Current earnings are $3.10 per share, and the stock currently sells for $85 per share. There are 3,400 shares outstanding. Ignore taxes and other imperfections in answering the first two questions.

a.Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth.

b.What will be the effect on Flashback’s EPS and PE ratio under the two different scenarios?

c.In the real world, which of these actions would you recommend? Why?

Explanation / Answer

a) price per share would likely increase because the company would buy shares on the open market to take away from shares outstanding (which is total shares held or in open market) thus making each share worth more.

b) EPS (earnings per share)-would be greater since there is less shares. PE (price-earning ratio)-would be greater as well since the price per share would be higher while the earnings stay the same so PE ratio increases.

c) in the real world, I would recommend share repurchase/buyback because it increases the confidence of shareholders in the long run thus generally leading to stock going higher

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