Question 2: You are on the board of directors of the B. Phillips Corporation, an

Question

Question 2: You are on the board of directors of the B. Phillips Corporation, and Phillips has announced its plan to pay dividends of $550,000. Presently there are 275,000 shares outstanding, and the earnings per share is $6. It looks like to you like the stock should sell for $45 after the ex-dividend date. If instead of paying a dividend, the management decides to repurchase stock

a.) What should be the repurchase price that is equivalent to the proposed dividend?

b.) How many share should the company repurchase?

c.) You want to look out for the small shareholders. If someone owns 100 shares, do you think he would prefer that the company pay the dividend or repurchase stock?

Explanation / Answer

a) Repurchase price of share: It will be purchased as current market price of stock

Dividend per share = $550,000/275,000 = $2
Ex-dividend price = Current Stock Price – Dividends Paid
=> $45 =Current stock price - $2
=> Current Stock price = $45 + 2 = $47

So, the repurchase price should be $47.

b) Number of shares to be repurchased = $550,000/$47 = 11,702

c)A small shareholder will always want a dividend instead of repurchase as his wealth is not going to change in any of the scenarios. However, a dividend will provide him return today only, which he can spend or invest according to his wish.

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