Giant Corporation had exceptional earnings last year. The Chairman of the Board would like to share the good results with shareholders and is evaluating either paying extra cash dividend or repurchasing shares directly from the market. In either case, $20 million would be spent.
The company has 8 million shares outstanding. The EPS of Giant Corporation is $4 and the stock currently sells for $50 per share. Ignore taxes and other imperfections.
Answer the following 6 questions a, b, c-i, c-ii, c-iii, c-iv completely and show all of works: (Please do not answer the questions if you are Anjoo Prasad or Choudhary)
a. Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholders’ wealth.
b. What will be the effect on Giant Corporation’s EPS and P/E ratio under the two different scenarios?
c - i. Under the condition of no tax and any imperfection:
From the shareholders’ point of view, are you indifferent in choosing between the two scenarios?
c - ii. Why?
c - iii. From Giant Corporation perspective, which of these actions would you recommend?
c - iv. Why?