ABC Inc. shares are trading at a price of $20 (that is, P0=20). The firm is contemplating
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Question:
ABC Inc. shares are trading at a price of $20 (that is, P0=20).
The firm is contemplating either paying a special dividend or buying back shares.
In both cases, the total amount spent will be $12 million. The firm has 6 million shares outstanding. The firm's current EPS is $1.00 per share.
i. Which is alternative is better for shareholders? Dividends or a share buyback?
ii. Which alternative gives you the higher EPS?
iii. Which alternative gives you the higher P-E multiple?
iv. Assume zero taxes. Does your answer change if the current share price undervalues the firm (that is, say the firm's true value per share is $30)
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