Flashback Corporation is evaluating an extra dividend versus a share repurchase.
ID: 2757792 • Letter: F
Question
Flashback Corporation is evaluating an extra dividend versus a share repurchase. In either case, $33,150 would be spent. Current earnings are $2.80 per share, and the stock currently sells for $80 per share. There are 5,100 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
Flashback Corporation is evaluating an extra dividend versus a share repurchase. In either case, $33,150 would be spent. Current earnings are $2.80 per share, and the stock currently sells for $80 per share. There are 5,100 shares outstanding. Ignore taxes and other imperfections.
Explanation / Answer
OPTION 1 : EXTRA DIVIDEND
Dividend Per Share = $ 33150/5100 shares = $ 6.50 per share
Ex-dividend Stock Price = $ 80 - $ 6.50 = $ 73.50 per share
Current P/E Ratio = $ 80/$2.80 = 28.57 times
When Stock goes ex- dividend , price of share is reduced to $ 73.50 , therefore the new EPS and P/E Ratio will be -
EPS = $ 2.80 (no change since there is no change in earnings of the company or number of shares outstanding.
P/E Ratio = $ 73.50 / 2.80 = 26.25 times
OPTION 2 - SHARES REPURCHASED
No of shares re-purchased = $ 33150 / $ 80 = 414.375 , taken at 415 shares
Balance shares outstanding = 5100 - 415 = 4685 shares
EPS = ( 2.80 * 5100) / 4685 = $ 3.05 per share.
P/E ratio = $ 80 /$ 3.05 = 26.23 times
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