Flemington Farms is evaluating an extra dividend versus a share repurchase.In either case, $10,000 would be spent.Current earnings are $2.10 per share, and the stock currently sells for $52 per share.There are 2,000 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)22.38; 22.38
B)24.87; 22.38
C)20.23; 24.87
D)22.38; 20.23
E)20.23; 22.38

Question

Quizplus · Accepted Answer

If the firm issues the dividend, the EPS will be $2.10 - ($10,000/2,000) = $2.00. The new stock price will be $52 - $2.10 = $49.90. The PE ratio will be $49.90/$2.00 = 24.95.If the firm does the share repurchase, the EPS will remain $2.10. The new number of shares outstanding will be 2,000 - (10,000/52) = 1,923.08. The new stock price will be $52. The PE ratio will be $52/$2.10 = 24.76.

Flemington Farms Is Evaluating an Extra Dividend Versus a Share