CASE 3 (30 points)

Beranger Corporation has the following market-value balance sheet. The stock currently sells for 25 a share, and there are 1,000 shares outstanding. The firm will either pay a 1 per share dividend or repurchase 1,000 worth of stock. Ignore taxes.

Assets Liabilities and Equity

Cash 2,000 Debt 10,000 Fixed assets 28,000 Equity 20,000

Instructions:

a.What will be the subsequent price per share if the firm pays a dividend?(4 points)

b.What will be the subsequent price per share if the firm repurchases stock?(5 points)

c.If total earnings of the firm are 2,000 a year, find earnings per share if the firm pays a dividend.(4 points)

1. Now find earnings per share if the firm repurchases stock.(4 points)
2. Find the price-earnings ratio if the firm pays a dividend.(4 points)
3. Find the price-earnings ratio if the firm repurchases stock.(4 points)

g.Why might a stock repurchase make more sense than an extra cash dividend? What is the effect of a stock repurchase on a firm's earnings per share? Its price-earnings ratio? (5 points)