Stock Repurchase. Sleight Corporation is evaluating an extra dividend versus a s

Question

Stock Repurchase.    Sleight Corporation is evaluating an extra dividend versus a share repurchase. In either case, $6,000 would be spent. Current earnings are $6 per share, and the stock currently sells for $52 per share. There are 500 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 Sleight’s EPS and PE ratio under the two different scenarios?

Explanation / Answer

a) If we only consider fixed cost $ 6000 in either case of dividend or reourchase of share by ignoring other factor like taxes,we definately can say dividend are better rather than repurchase of share,because to repurchase of share presetly company require current assets like bank balance or cc limit and currently selling price of share $ 52 per share which are comparativly high then $ 6 dividend.

b) Sleight's EPS in case of repurchase will reduces as number of share could be increses and PE ration will increases as dividend will no more to pay in case of repurchase and in case of dividend distribution situation will be viseversa.

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