Firm A generates total earnings of $100,000 during the year with 10,000 shares outstanding. And they are considering the following options to spend its free cash flow today $20,000: (i) pay a cash dividend of $20, 000; (ii) use $20,000 of cash to repurchase shares of the company. Suppose that Firm A has 10,000 shares and its shares are currently trading at $5 per share. In making their decision, the board of directors would like to consider the impact of each of those options on the earnings per share (EPS) of the company. What will be the EPS under (i) and (ii) respectively?  If you are a shareholder of the company who is in a high personal tax bracket and do not have a need for short term cash, which option would you like the company to choose and why?

Answer rating: 100% (QA)

Earnings is 1 lakh Shares outstanding is 10000 Earnings per ... View the full answer