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# Effect on the corporations EPS and PE ratio

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The corporation is evaluating an extra dividend vs. a share repurchase. In either case, \$13,000 would be spent. Current earnings are \$2.60 per share and the stock currently sells for \$60 per share. There are 800 shares outstanding. Ignore taxes and other imperfections.

I need help with determining the effect on the price per share of the stock and shareholder wealth? What will be the effect on the corporations EPS and PE ratio under the 2 different scenarios?

What actions would you recommend in a real world situation? Thanks do much for your help and input!!!

#### Solution Preview

Market Value of the company = Price per share * Number of shares outstanding
= 60*800 = \$48,000

Current figures
• Price per share = \$60
• Shareholder's wealth = \$60 * 800 = \$48,000
• EPS = \$2.6
• P/E = \$60/\$2.6 = 23.08

The corporate action (extra dividend or share repurchase) implies a cash outflow from the company and would reduce the value of the company by that amount.
I.e. Market Value of the company post corporate action = \$48,000 - \$13,000
= \$ 35,000
This implies that in either option the shareholder's ...

#### Solution Summary

A table showing ways to analyze and computations explained clearly.

\$2.19