Sterling Resources is evaluating an extra dividend versus a share repurchase. In

Question

Sterling Resources is evaluating an extra dividend versus a share repurchase. In either case, a total of $4,000 would be spent. Current earnings are $2.10 per share, and the stock currently sells for $46 per share. There are 800 shares outstanding. In the real world (i.e. allowing for taxes and other imperfections to be possible in our example), which of following statements is true? For purposes of distributing earnings, a share repurchase is preferred to a dividend because a share repurchase maximizes earnings per share. For purposes of distributing earnings, a dividend is preferred to a repurchase because a dividend represents a certain cash flow to shareholders. For purposes of distributing earnings, a dividend is not preferred to a share repurchase because a dividend reduces share price. For purposes of distributing earnings, a share repurchase is preferred to a dividend because a share repurchase provides shareholders with the option to choose the time at which they incur a tax liability.

Explanation / Answer

For purposes of distributing earnings, a dividend is not preferred to a share repurchase because a dividend reduces share price.

Generally share price includes dividend per share.

Once the dividend is issued the share price will fall.

Thanks

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