Question: Blue Skies Company has earnings available for common stockholders of $4 million and has 1,000,000 shares of common stock outstanding at $120 per share. The firm is currently contemplating the payment of $4 per share in cash dividends.
1) Calculate the firm's current earnings per share (EPS) and price/earnings (P/E) ratio
2) If the firm can repurchase stock at $124 per share, how many shares can be purchased in lieu of making the proposed cash dividend payment?
3) How much will the EPS be after the proposed repurchase? Why?
4) If the stock sells at the old P/E ratio, what will the market price be after repurchase?
5) Compare and contrast the earnings per share before and after the proposed repurchase.
6) Compare and contrast the stockholders' position under the dividend and repurchase alternatives.