Flashback Corporation is evaluating an extra dividend versus a share repurchase.
ID: 2762656 • Letter: F
Question
Flashback Corporation is evaluating an extra dividend versus a share repurchase. In either case, $32,500 would be spent. Current earnings are $2.90 per share, and the stock currently sells for $81 per share. There are 5,000 shares outstanding. Ignore taxes and other imperfections.
What will Flashback’s EPS and PE ratio be under the two different scenarios? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Flashback Corporation is evaluating an extra dividend versus a share repurchase. In either case, $32,500 would be spent. Current earnings are $2.90 per share, and the stock currently sells for $81 per share. There are 5,000 shares outstanding. Ignore taxes and other imperfections.
Explanation / Answer
Under Extra Dividend :
EPS : $ 2.5
P/E Ratio = $ 25.68 *
*Earning per share =32,500/5000 = 6.5
PE ratio = price-EPS/current EPS
= 81 - 6.5= 74.5 / 2.90= $ 25.68
Under Repurchases: If the company repurchases stock, the number of shares will decreases. The total net income is the EPS time the current number of shares outstanding. Dividing net income by the new numbers of shares outstanding we can find the EPS under repurchase,
EPS = Current EPS(O/s shares)/(O/s shares – No.of Repurchase shares)
= $ 2.90 (5,000)/ (5,000-401*)
= 14,500/4,599
EPS = $ 3.15
*No of repurchase shares= 32,500/ 81 =401 shares
PE Ratio :
PE ratio : $ 81 /3.15 = 25.71
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