Alex, Inc. is ﬁnanced 100% with equity. The ﬁrm has 100,000 shares of stock outstanding with a market price of $5 per share. Total earnings for the most recent year are $50,000. The ﬁrm has
Cash of $25,000 in excess of what is necessary to fund its positive NPV projects. The ﬁrm is
Considering using the cash to pay an extra dividend of $25,000 or, alternatively, to repurchase
$25,000 of stock. The ﬁrm has other assets worth $475,000 (market value). For each of the
Questions that follow, assume there are no transaction costs, taxes, or other market imperfections.
Assume the ﬁrm pays the $25,000 excess cash in the form of a cash dividend. What will be the
ﬁrm's price/earnings ratio once the dividend is paid?

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The Answer of Alex, Inc. is ﬁnanced 100% with equity. The ﬁrm has 100,000 shares of stock outstanding with a market price of $5 per share. Total earnings for the most recent year are $50,000. The ﬁrm has
Cash of $25,000 in excess of what is necessary to fund its positive NPV projects. The ﬁrm is
Considering using the cash to pay an extra dividend of $25,000 or, alternatively, to repurchase
$25,000 of stock. The ﬁrm has other assets worth $475,000 (market value). For each of the
Questions that follow, assume there are no transaction costs, taxes, or other market imperfections.
Assume the ﬁrm pays the $25,000 excess cash in the form of a cash dividend. What will be the
ﬁrm's price/earnings ratio once the dividend is paid?

Alex, Inc Is ﬁNanced 100% with Equity