DB, Inc. is publicly traded with a stock price of $30 per share and 100,000,000 shares outstanding. It also expects to have total net earnings of $300,000,000. DB has $100 million in surplus cash that it wants to pay to shareholders. One option is to pay a special dividend. The other option is to repurchase stock with the cash. 

Evaluate the two alternatives below (ignoring any information effects):

a. What is the price of the company’s stock if it announces

i. a special dividend will be paid (with all $100 million)

ii. stock will be repurchased (totaling $100 million) on the open market

b. What is the EPS of the company if it

i. pays a special dividend with all $100 million

ii. repurchases stock totaling $100 million on the open market

c. What is the P/E ratio of the company if it

i. pays a special dividend with all $100 million

ii. repurchases stock totaling $100 million on the open market

d. Give two reasons why the company should choose to pay the special dividend and two reasons why the company should repurchase the stock.

Answer rating: 100% (QA)

a Stock Price after Announcements i If the company announces a special dividend of 100 million this amount will be distributed among the shareholders ... View the full answer