Problem:
Company B's market-value balance sheet is presented below. There are 1,000 shares outstanding, and each share currently sells for $20. Earnings available for common shareholders are $2000 per year. The firm will either pay a $1 per share dividend or repurchase $1000 worth of stock.
Requirement:
Question 1: Calculate the price per share and price-earnings ratio under each alternative.
Question 2: Briefly discuss why a company might prefer either a cash dividend or a stock repurchase.
- Assets:- Cash : $2000, Other assets: $28,000
- Liabilites and equit:- DEbt $10,000 Equity: $20,000
Note: Show supporting computations in good form.