A firm with earnings of $500,000 has 100,000 shares outstanding, trading at $12 per share. The firm
Question:
A firm with earnings of $500,000 has 100,000 shares outstanding, trading at $12 per share. The firm has $150,000 of free cash that management would like to disburse to shareholders in one of three ways.
Method 1The firm could pay out the cash in a cash dividend.
Method 2The firm could use the cash to repurchase shares on the open market.
Method 3The firm could issue a stock dividend.
Consider an investor owning 10,000 shares in the firm, worth a total of $120,000.How is the investor's wealth and the EPS of the company affected by each of the above methods?If you ignore taxes, which method would the investor prefer?If capital gains were taxed at 20 percent and dividends were taxed at 25 percent, which method would the investor prefer?Assume efficient markets.
Expert Answer:
Lets calculate the impact of each method on the investors wealth and the earnings per share EPS of t... View the full answer
