Final answer:
XYZ Corporation must understand the effects of an extra dividend and a share repurchase, particularly on price per share, shareholder wealth, EPS, and P/E ratio. Dividends distribute a fixed amount of money across existing shares while repurchases reduce the number of shares, potentially altering EPS and individual shareholder wealth.
Step-by-step explanation:
The student's question concerns the financial consequences for XYZ Corporation when evaluating an extra dividend versus a share repurchase decision. Given that current earnings are $1.65 per share, the stock price is $58 per share, and there are 2,000 shares outstanding, XYZ Corporation decides to spend $14,500 on either an extra dividend or a share repurchase. In both scenarios, the total market capitalization may not change immediately, but the effect on shareholder wealth per share might vary depending on personal tax situations and market perceptions.
In the case of an extra dividend, the $14,500 would be divided across all 2,000 shares, amounting to $7.25 per share in dividends. As dividends are paid out, earnings per share (EPS) remain unchanged at $1.65 since the number of shares remains the same. The price-to-earnings (P/E) ratio also remains unchanged. In the case of a share repurchase, the company would buy back $14,500 worth of shares at the market price of $58 per share, equal to approximately 250 shares. Post-repurchase, there would be 1,750 shares outstanding. Shareholder wealth per share may increase due to a reduced number of shares outstanding. The new EPS would be higher because the same earnings would now be spread over fewer shares. The updated P/E ratio would need to be calculated taking into account the new EPS and potentially adjusted share price post-repurchase.