Question

?(Repurchase of stock?) The Dunn Corporation is planning to pay dividends of ?$540 comma 000540,000. There are 270 comma 000270,000 shares? outstanding, and earnings per share are ?$66. The stock should sell for ?$5050 after the? ex-dividend date.? If, instead of paying a? dividend, the firm decides to repurchase? stock, a. What should be the repurchase? price? b. How many shares should be? repurchased? c. What if the repurchase price is set below or above your suggested price in part ?(a?)? d. If you own 100? shares, would you prefer that the company pay the dividend or repurchase? stock?

Answer 1

Proposed Dividend = 540,000
Shares Outstanding = 270,000
EPS = 6
Ex-dividend price = 50.00
Proposed dividend/share =2.00

a. Repurchase Price = 50 + 2 = 52
b. Number of shares repurchased = 540,000/52 = 10384.62
c. The capital gains to be received by the stockholder would not be equal to theintended dividend, thus resulting in a dollar benefit or loss to the stockholders
d. Unless you have a need for current income, you would probably prefer the stockrepurchase plan.