Big Industries has the following market-value balance sheet. The stock currently sells for $20 a share, and

Question:

Big Industries has the following market-value balance sheet. The stock currently sells for $20 a share, and there are 1,000 shares outstanding. The firm will either pay a $1 per share or repurchase $1,000 worth of stock. Ignore taxes.

a. What will be the subsequent price per share if the firm pays a dividend?
b. What will be the subsequent price per share if the firm repurchases stock?
c. If total earnings of the firm are $2,000 a year, find earnings per share if the firm pays a dividend.
d. Now find earnings per share if the firm repurchases stock.
e. Find the price-earnings ratio if the firm pays a dividend.
f. Find the price-earnings ratio if the firm repurchases stock.
g. Adherents of the "dividends-are-good" school sometimes point to the fact that stocks with high dividend payout ratios tend to sell at above-average price-earnings multiples. Is Big Industries' P/E ratio higher if it pays a dividend?
h. Looking back at your answers to parts (a) to (f), do you think that the difference in P/E supports the "dividends-are-good" case?

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