Question: ABC Co. is evaluating an extra dividend versus a share repurchase. In either case, $5,000 would be spent. Current earnings are $0.95 per share (EPS),

ABC Co. is evaluating an extra dividend versus a share repurchase. In either case, $5,000 would be spent. Current earnings are $0.95 per share (EPS), and the stock currently sells for $40 per share. There are 200 shares outstanding. Ignore taxes and other imperfections in answering 1) and 2).

  1. Evaluate the two alternatives in terms of the effect on the price per share of the stock and stockholder wealth.
  2. What will be the effect on the companys EPS and P/E ratio under the two different scenarios?

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