Question

Hodgkiss corporation is evaluating an extra dividend versus a share repurchase. in either case, $25,960 would be spent. current earnings are $2.80 per share, and the stock currently sells for $95 per share. there are 4,400 shares outstanding. ignore taxes and other imperfections. what will the company's eps and pe ratio be under the two different scenarios?

Answer 1

If Hodgkiss corporation plans to declare extra dividend out of $25,960 then a dividend of $5.90 shall be declared and EPS shall remain $2.80 since number of shares outstanding continues to be 4400. and PE ratio would be 95 divided by $2.80 i.e.33.93. In case of repurchase, at a share price of $95, with $ 25960 company can repurchase 273 shares, resulting in 4127 number of outstanding shares in the market. Company's earning is $2.8*4400= $12320. With number of shares outstanding at 4127, new eps would be $12320 divided by 4127 i.e. $2.98. New PE ratio would be $95/$2.98 i.e. 31.88