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Gohar Corporations is deciding whether to payout $500 in excess cash in form of an extra dividend and or a share repurchase. current earning are $ 2.50 per share and stock sells for $25. Market value balance sheet before paying out excess cash is as follows.
Excess Cash $ 500 Debt $ 500
Other Assets $2,500 Equity $2,500Total $3,000 Total $3,000
Required:
Evaluate two alternative in terms of effect on price per share of stock, EPS and PE Ratio.As with your previous question, you must have an answer in the same book as the question, and so tell me where your problem is and I will then try and help you.
Please do not simply set questions to test me.
My intention is not to test you, the Question I have found elsewhere but not able to find the answer please help me to get it off as soon as possible. I am waiting for your kind support.
If possible within three hours.Sorry for inconvenience, kindly please answer the quiz, its for my brother who is going to be examined tomorrow.
The real problem is that this is clearly not a Paper F9 exam type question. For Paper F9 you would be given more information and you would be asked for different things.
The only help I can give you is that currently there are 100 shares (2500/25).
The PE ratio is MV/EPS = 25/2.5 = 10Paying an extra dividend will increase the total market value by 3,000 without changing the EPS or the number of shares.
Buying back the shares will reduce the MV by 500 and will reduce the number of shares by 20 (500/25) but will not change the MV per share. However because there are fewer shares it will increase the EPS.Thanks once again.
One more quiz is-in case of dividend market price of share will increase and affect PE ratio?Yes – because the MV value per share is higher. But also the number of shares will be lower to the EPS will be higher. The PE ratio will be one divided by the other (MV/EPS)
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