ABC Inc. shares are trading at a price of $20 (that is, P0=20).

The firm is contemplating either paying a special dividend or buying back shares.

In both cases, the total amount spent will be $12 million. The firm has 6 million shares outstanding. The firm's current EPS is $1.00 per share.

i. Which is alternative is better for shareholders? Dividends or a share buyback?

ii. Which alternative gives you the higher EPS?

iii. Which alternative gives you the higher P-E multiple?

iv. Assume zero taxes. Does your answer change if the current share price undervalues the firm (that is, say the firm's true value per share is $30)

Answer rating: 100% (QA)

i To determine which alternative is better for shareholders we need to consider the impact on shareholder value In the case of dividends the 12 millio... View the full answer