Question

​(Repurchase of stock​) The Dunn Corporation is planning to pay dividends of ​$480 comma 000. There are 240,000 shares​ outstanding, and earnings per share are ​$5. The stock should sell for ​$52 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

a. Dividend per share= Dividends/ Outstanding shares= 480000/240000= 2

After the ex-dividend date if the stock sells for $ 52.

then the repurchase price must be equal to its cum-dividend price, which is

=$52+$2= $54

b. Shares repurchased will be earnings available to company divided by repurchase price. The earnings available will be equal to proposed dividend which is

= $480000/$54= 8888.88 shares

c. If the repurchase price is set below the suggested price he may incur losses because now he won't be able to recover his dividend income.

If repurchase price is set above the suggested price then he will gain extra price after $54 will be his capital income.

d. If i own 100 shares i would go for repurchase stock as it will yield a large sum of money at the current date.