Hello,

I am posting this question actually only to be revised by an expert in the business finance field. I have completed the attached questions, however I would very much appreciate your help in correcting any mistakes espically in regards to part e) as I was not totally confident with my answer. I understand as part of chegg regulations you only have to answer up to 4 parts of a question although since I would only like aid in revising my work I please ask that you take a look at part e) and f) as well. I would greatly appreciate it, Thank you.

A firm is debating whether or not to conduct a share repurchase or pay a special dividend with $11,000 cash. Current EPS is $1.40 per share, and the 2,000 shares outstanding currently sell for $58 each. You own exactly 1 share.

a) If the firm makes the special dividend payment, what will your total wealth be?

Total wealth = Special Cash Dividend + Current Shares

Total wealth = ($11,000/2,000) + $58

Total wealth = $5.5 + ($58 - $5.50) = $58

Therefore, if the firm makes the special dividend payment, your total wealth will remain the same since your price per share decreases by the amount of the dividend when it is issues.

b) If the firm repurchases shares, how many shares will be repurchased, and what will your total wealth be?

Shares to be repurchased = $11,000 / $58

Shares to be repurchased = 189.6 or 189 (cannot buy half a share)

Company Equity after Repurchase = 1,811 x $58 =$105,038

Outstanding Shares = 1,811

Total Wealth = $105, 038/ 1,811 = $58

Therefore, there are 189 shares repurchased, and the total wealth is $58.

c) If the firm makes the special dividend payment, what will the P/E ratio be?

P/E ratio= share price/EPS

P/E= 52.50/1.40 = $37.50

Therefore, the P/E ratio is $37.50

d) If the firm repurchases shares, what will the new EPS be?

EPS = net income/shares outstanding

Net Income = EPS*shares outstanding

Net Income = 1.4*2000

Net Income = $2,800

New EPS = Net Income/ shares outstanding after repurchase

New EPS = $2,800 / 1,811

New EPS = $1.546

The new earnings per share will be $1.55

e) If the firm repurchases shares, what will the new P/E ratio be?

New P/E ratio = share price /new EPS

New P/E ratio= $58/1.55 =$37.516

The new P/E ratio is $37. 516

f) From your perspective as an investor, would you prefer a special dividend or a share repurchase? Why?

If commissions, taxes, and other imperfections are ignored in our example, the stockholders shouldn't care which option is chosen. A cash dividend doesn't affect a stockholder's wealth if there are no imperfections.