Question

Flychucker Corporation is evaluating an extra dividend versus a share repurchase. In either case $19,000 would be spent. Current earnings are $1.40 per share, and the stock currently sells for $50 per share. There are 5,000 shares outstanding. Ignore taxes and other imperfections. a. Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth per share

Answer 1

Answer:

Alternative I: (Extra dividend)

Price per share is $ 46.20

Shareholder wealth per share is $ 42.40

Alternative II: ( Share repurchase)

For share repurchase, the price per share and the shareholder wealth is equal to the stock price.

Explanation:

Alternative I: (Extra dividend)

Amount spent = $19,000

Outstanding shares = 5,000 shares

Stock price = $50

Price per share = Stock price - $\frac{Amount spent}{Outstanding Shares}$

= $50 - $\frac{19,000}{5,000}$ = $50 - $3.8

= $ 46.20

Shareholder wealth per share = Price per share - $\frac{Amount spent}{Outstanding Shares}$

= $46.20 - $3.8

=$ 42.40

Alternative II: ( Share repurchase)

For share repurchase, the price per share and the shareholder wealth is equal to the stock price.