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# 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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