Solved: Effect on price per share of stock and shareholder wealth, Finance Basics

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Effect on price per share of stock and shareholder wealth

Problem:

I am trying to figure out the steps to this problem: Straka Corporation is evaluating an extra dividend versus a share repurchase. In either case, $9600 would be spent. Current earnings are $2.50 per share, and the stock currently sells for $50 per share. There are 600 shares outstanding. Ignore taxes and other imperfefections in answering the first two questions.

a) Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth.

b) What will be the effect on Straka's EPS and PE ratio under the two different scenarios?

c) In the real world, which of these actions would you recommend? Why?

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Finance Basics: Effect on price per share of stock and shareholder wealth

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