Question

Hodgkiss corporation is evaluating an extra dividend versus a share repurchase. in either case, $27,000 would be spent. current earnings are $2.70 per share, and the stock currently sells for $96 per share. there are 4,500 shares outstanding. ignore taxes and other imperfections. what will the company's eps and pe ratio be under the two different scenarios? (do not round intermediate calculations and round your answers to 2 decimal places,
e.g., 32.16.) extra dividend share repurchase eps $ 6 $ pe ratio

Answer 1

If extra dividend is given,

Dividend per share = Net income / Number of shares outstanding

Dividend per share = $ 27,000 / 4,500 shares

Dividend per share = $ 6 per share

Now. the price will reduce by $ 6 per share

Earnings per share will be $ 2.70 per share.

Price earnings ratio = New price / Earnings per share

Price earnings ratio = $ 96 - $ 6 / $ 2.70 = 33.33

If the shares were purchased from $ 27,000 -

Number of shares purchased = $ 27,000 / $ 96 = 281.25 or 281 shares

Total earnings = $ 2.70 X 4,500 shares = $ 12,150

New EPS = $ 12,150 / (4500 shares - 281 shares) = $ 2.88 per share

New Price earnings ratio = Price / Earnings per share

New Price earnings ratio = $ 96 / $ 2.88 = 33.33