A firm is evaluating an extra dividend versus a share repurchase. In either case, $25,000 would be spent. Current earnings are $5.40 per share, and the stock currently sells for $58 per share. There are 1,000 shares outstanding. Ignore taxes and other imperfections in your answer. Evaluate the two alternatives in terms of the effect on the following: 1. price per share 2. EPS 3. P/E ratio 4. shareholder wealth

Case of Dividend payout:

DPS = D / N = 25,000 / 1,000 = 25

Price per share after dividend = Price prior to dividend - DPS = 58 - 25 = 33

EPS = same as before = 5.40

P/E declines to = 33/5.40 = 6.11

Shareholders wealth = same as before = 58 per share (DPS of 25 + Ex dividend price of 25)

Case of share repurchase:

Number of shares repurchased, n = D / P = 25,000 / 58 =  431

New number of shares outstanding, N = N0 - n = 1,000 - 431 = 569

Price per share = (Old market cap - share repurchase amount) / N = (58 x 1,000 - 25,000) / 569 = 58 (same as before)

EPS = (Old EPS x N0) / N = 5.40 x 1,000 / 569 = 9.49 (increase)

P/E ratio = 58 / 9.49 =  6.11

Shareholder's wealth = same as before