Question

Flemington Farms is evaluating an extra dividend versus a share repurchase. In either case, $15,000 would be spent. Current earnings are $2.80 per share, and the stock currently sells for $75 per share. There are 2,800 shares outstanding. Ignore taxes and other imperfections. The PE ratio will be ____ if the firm issues the dividend as compared to ____ if the firm does the share repurchase.a) 24.87; 24.87b) 24.87; 26.79c) 26.79; 24.87d) 26.79; 26.79e) 26.79; 27.13

Answer 1

Answer:

correct option is a) 24.87; 24.87

Explanation:

given data

spent = $15000

current earnings = $2.80 per share

stock currently sells = $75 per share

shares outstanding = 2,800

top find out

PE ratio

solution

first we get here dividend per share that is express as

dividend per share = $\frac{spent}{outstanding\ share}$   ................1

dividend per share = $\frac{15000}{2800}$

dividend per share = $5.3571

and price after dividend will be here as

price after dividend = stock currently sells - dividend per share    ............2

price after dividend = $75 - $5.3571

price after dividend = $69.6429

so  PE ratio will be

PE ratio is = $\frac{69.6429}{2.80}$

PE ratio is = 24.87

and

now we get share  repurchased  that is

shares repurchased = $\frac{spent}{stock\ currently\ sells}$    .......3

shares repurchased = $\frac{15000}{75}$      

shares repurchased = 200      

so EPS will be  as

EPS is = 2.80 × $\frac{2800}{2600}$

EPS = 3.015  

so PE ratio will be as

PE ratio is  = $\frac{75}{3.015}$

PE ratio is = 24.87

correct option is a) 24.87; 24.87