Flashback Corporation is evaluating an extra dividend versus a share repurchase.

Question

Flashback Corporation is evaluating an extra dividend versus a share repurchase. In either case, $22,000 would be spent. Current earnings are $3.70 per share, and the stock currently sells for $91 per share. There are 4,000 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 $ 3.7 $ PE Ratio 23.11

Explanation / Answer

Extra dividend:

Dividend per share = 22000/ 4000

= $5.5

Earnings per share = 3.7 + 5.5 = $9.20

PE ratio = 91/ 9.20

= 9.89

Share repurchase:

No. of shares repurchased = 22000/ 91 = 242 shares

No. of shares outstanding = 4000-242

= 3758 shares

Earning per share = (3.7x 4000) / 3758

= $3.94

PE Ratio = 91/ 3.94

= 23.10

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