a$)$ Everystate Inc. is evaluating an extra dividend versus a share

repurchase. In either case, $$9,000$ would be spent. Current

earnings are $$1\mathrm{.}30$ per share and the stock currently sells for

$$64$ per share. There are $1,000$ shares outstanding. In answering

the questions that follow, ignore taxes for the first two:

i$)$ Evaluate the two choices in terms of their effect on the

price per share of stock and shareholder wealth

$(2$ marks$)$

$3$

ii$)$ What will be the effect on Everystate$$s EPS and P$/$E ratio

under the two different scenarios?

$(2$ marks$)$

iii$)$ In the real world, which of these choices will you

recommend? Why?

$(1$ mark$)$

b$)$ At present, total dividends for each of the next two years are

set equal to the cash flow of $$10,000$ per year. There are $100$

shares outstanding, so the dividend per share is $$100.$ The price

per share at the moment is $$173\mathrm{.}55$ and the required return of

investors is $10\%.$ There is an alternative choice of paying

$$11,000$ total dividends in the first year $($$$110$ per share$),$

followed by a liquidating dividend of $$8,900($$$89$ per share$)$ in

the second. You prefer the first alternative but the firm$$s

management adopts the second alternative. You have $50$ shares to

begin with and if you choose to create homemade dividends, how

many shares will you have at the end of the first year?