Flashback Corporation is evaluating an extra dividend versus a share repurchase.
ID: 2721901 • Letter: F
Question
Flashback Corporation is evaluating an extra dividend versus a share repurchase. In either case, $35,510 would be spent. Current earnings are $3.30 per share, and the stock currently sells for $78 per share. There are 5,300 shares outstanding. Ignore taxes and other imperfections. Requirement 1: What will Flashback’s EPS and PE ratio be under the two different scenarios? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Extra Dividend Share Repurchase EPS $ $ PE Ratio Requirement 2: In the real world, which of these actions would you recommend?
Explanation / Answer
2. a. From the point of view of the investor, dividend forms a major component of investor return. A share repurchase would ofcourse, by reducing the outstanding number of shares in the market place, lead to an increase in the share price of the company. But the investor does not realize the capital gains unless and until he actually sells the shares.
b. If the shares of a company are undervalued, it makes sense to go for a share repurchase. However, if the shares are overvalued, a share repurchase would not be beneficial to either the company or to its investors.
Extra dividend Share repurchase Current earnings ( 5,300 x $ 3.30) $ 17,490 $ 17,490 Market price per share $ 78 $ 78 Number of shares outstanding 5,300 4,845 EPS $ 3.30 $ 3.61 PE ratio ( Market price per share / EPS) 23.64 21.61Related Questions
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