A company has the following:

• 1,000,000 shares outstanding
• A current stock price of $25
• $750,000 in net income for the most recent year
• A P/E ratio of 33.3
• $4,000,000 of excess cash

The company anticipates constant performance in the upcoming year (that is, same net income and constant P/E). It is contemplating issuing a one-time dividend for the full amount of the excess cash OR buying back 125,000 shares of stock at a premium price of $28 per share. You own 1,000 shares. Which of the 2 options provides the best shareholder return (provide the math support)?

Answer rating: 100% (QA)

Solution Current market Price 25 Per Share Redeemable Value of Share 28 Per Share PE Ratio 3333 Curr... View the full answer