Stock Repurchase
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I am trying to figure out the steps to this problem: Straka Corporation is evaluating an extra dividend versus a share repurchase. In either case, $9600 would be spent. Current earnings are $2.50 per share, and the stock currently sells for $50 per share. There are 600 shares outstanding. Ignore taxes and other imperfefections in answering the first two questions. a) Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth. b) What will be the effect on Straka's EPS and PE ratio under the two different scenarios? c) In the real world, which of these actions would you recommend? Why?
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Solution Summary
What will be the effect on Straka's EPS and PE ratio under the two different scenarios?
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a) Under the assumption that there are no taxes and no imperfections in the market, dividend policy does not have any impact on the wealth of the shareholders. Whether the company distribute extra dividends or it repurchase its shares, it is not going to have any impact on the overall welath of the shareholders.
The current wealth of the shareholders = 50*600=$30,000
If dividends are distributed
Extra Dividend planned per share = $9600 / 600 = $16.00 per share.
Thus post dividend payment the price of the stock will decrease by the amount of the dividend paid. The stock ...
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