Session+22 (1)

Net incomefortheyearjustendedis49000and

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Unformatted text preview: y and are greater in value than dividend payments 5 Dividends and Stock Repurchase: An example An all equity company has excess cash of $300,000, other assets worth $700,000. Net income for the year just ended is $49,000 and market value of equity is $1 million. There are 100,000 shares outstanding. EPS = $ Net income/# of shares outstanding = $0.49 P/E = Price per share/EPS = $10/0.49 = 20.4 The management is considering two alternatives: $300,000/100,000 = $3 extra cash dividend Repurchase $300,000/10 = 30,000 shares of stock 6 Dividends and Stock Repurchase: An example Market Value Balance Sheet(after paying out excess cash as dividends) Excess Cash Other Assets Total $ 0 Debt 700,000 Equity $700,000 $ 0 700,000 $700,000 Each share is worth $7 Total shareholder value: (100000 x 7) + (100000 x 3) = $1 million EPS= $0.49 P/E= 7/0.49 = 14.3 A cash dividend does not affect shareholder wealth if there are no taxes and market imperfections 7 Dividends and Stock Repurchase: An example Market Value Balance Sheet(after a repurchase of 30,000 shares) Excess Cash $ 0 Debt $ 0 Other Assets 700,000 Equity 700,000 Total $700,000 $700,000 Each share is worth $700,000/70,000 = $10 EPS= $49,000/70,000 = $0.70 P/E= $10/0.7 = 14.3 If there are no market im...
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