Question

Alpha Ltd are deciding whether to pay out 90 000 in accumulated cash in the form of an extra dividend to shareholders or embark on a share repurchase scheme. Current profits are 3.40 per share and their shares currently trade for 35.

Their abbreviated balance sheet before paying out the dividend is as follows:

Equity 350 000 Bank/Cash 130 000

Debt 120 000/470 000    Other assets 340 000/470 000

Evaluate each alternative (i.e. pay the dividend or repurchase the shares) by

1 Calculating the number of shares in issue

2 The dividends per share (only for the first alternative, i.e. pay the dividend)

3. Calculate the new share price

4. Calculate the EPS

5 Calculate the price-earnings ratio

Answer 1

1. Equity 350000

current share price 35

So, number of share =350000/35=10000.

2. current dividend is 3.4*10000=34000.

But having additional fund of 90000.

So, total dividend in first option is =34000+90000=124000

So, dividend per share in first option is 124000/10000=12.40

3. If from 90000 new shares issued then total number of share can be issued is =90000/35=2571

S, revised number of shares would be =10000-2571=7429.

So, new price of the shares would be=350000/7429=47.11

4. EPS would be =34000/7429=4.57

5. PE would be 47.11/4.57=10.30