Question

Flemington Farms is evaluating an extra dividend versus a share repurchase. In either case, $15,000 would be spent. Current earnings are $2.80 per share, and the stock currently sells for $75 per share. There are 2,800 shares outstanding. Ignore taxes and other imperfections. The PE ratio will be ____ if the firm issues the dividend as compared to ____ if the firm does the share repurchase.a) 24.87; 24.87b) 24.87; 26.79c) 26.79; 24.87d) 26.79; 26.79e) 26.79; 27.13

Answer 1

correct option is a) 24.87; 24.87

Step-by-step explanation:

given data

spent = $15000

current earnings = $2.80 per share

stock currently sells = $75 per share

shares outstanding = 2,800

top find out

PE ratio

solution

first we get here dividend per share that is express as

dividend per share =
`(spent)/(outstanding\ share)` ................1

dividend per share =
`(15000)/(2800)`

dividend per share = $5.3571

and price after dividend will be here as

price after dividend = stock currently sells - dividend per share ............2

price after dividend = $75 - $5.3571

price after dividend = $69.6429

so PE ratio will be

PE ratio is =
`(69.6429)/(2.80)`

PE ratio is = 24.87

and

now we get share repurchased that is

shares repurchased =
`(spent)/(stock\ currently\ sells)` .......3

shares repurchased =
`(15000)/(75)`

shares repurchased = 200

so EPS will be as

EPS is = 2.80 ×
`(2800)/(2600)`

EPS = 3.015

so PE ratio will be as

PE ratio is =
`(75)/(3.015)`

PE ratio is = 24.87

correct option is a) 24.87; 24.87