Flemington Farms is evaluating an extra dividend versus a share repurchase. In e
ID: 2722993 • Letter: F
Question
Flemington Farms is evaluating an extra dividend versus a share repurchase. In either case, $15,000 would be spent. Current earnings are $2.80 per share, and the stock currently sells for $75 per share. There are 2,800 shares outstanding. Ignore taxes and other imperfections. The PE ratio will be ____ if the firm issues the dividend as compared to ____ if the firm does the share repurchase.
a) 24.87; 24.87
b) 24.87; 26.79
c) 26.79; 24.87
d) 26.79; 26.79
e) 26.79; 27.13
Please show work.
a) 24.87; 24.87
b) 24.87; 26.79
c) 26.79; 24.87
d) 26.79; 26.79
e) 26.79; 27.13
Please show work.
Explanation / Answer
a) 24.87; 24.87
Dividend per share=15000/2800=5.3571
Price after dividend=75-5.3571=69.6429
P/E=69.6429/2.80=24.87
Shares repurchased = 15000/75=200
EPS=2.80*2800/2600=3.015
P/E=75/3.015=24.87
a) 24.87; 24.87
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