Telink, Inc. is planning to pay $4 million ($4 per share) in dividends to its common stockholders. The following earnings and market price information are provided for Telink:

In a recent meeting, several board members, who are also major stockholders, questioned the need for the dividend payment. They maintained that they did not need the dividend income and suggested that the firm simply reinvest the earnings to fund future investments. In response to the suggestion, Telink’s management argued that the firm’s investment opportunities were not sufficiently profitable to justify retention of the income. Specifically, the required rate of return from the capital market was higher than the rate of return the firm thought it could earn by reinvesting the money in the firm.

As an alternative to paying dividends or reinvesting the earnings, the company’s chief financial officer suggested that the firm repurchase company stock. This way the directors who did not want income from dividends could refrain from selling their shares and avoid current income.

To illustrate the effects of a share repurchase, the company CFO suggested that the firm repurchase shares at a price of $64, which is the current market price plus the value of the proposed $4 dividend. He then said that the effect of the share repurchase would be the same as paying the dividend. Was he right?

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Net income Number of shares Earnings per share Price/earnings ratio Expected market price per share after the dividend payment $7,500,000 1,000,000 $7.50 8 $60