Peyhout Company's shares are currently trading at RM 10. The company's number of authorized shares is 100,000 shares, out of which RM 60,000 shares are issued and fully paid up. Peyhout's net income for the year is likely to be RM 100,000. There are two views from the shareholders. The first is that Peyhout should pay a dividend of RM 1 per share. The second view is that Peyhout should repurchase shares.

a) If Peyhout pays dividends of RM 1 per share, determine what will happen to its share price, equity market value, earnings per share, and price to earnings ratio.

b) If Peyhout repurchases shares such that the total cash outflow is the same as the 'pay dividends' scenario in (a) above, what will happen to its share price, equity market value, earnings per share, and price to earnings ratio

c) Drawing purely from your findings in (a) and (b) above, is it better for Peyhout to pay dividends of RMI per share or to repurchase shares? Besides this consideration, discuss TWO(2) other factors you would consider when you are to choose between dividends and share repurchase?

d)If most of Peyhout's shareholders are in the high-income tax bracket, would they prefer to pay more dividends or to repurchase more shares? Why?

Answer rating: 100% (QA)

Lets go through each part of the question a Dividend Payment Scenario Dividends per share RM 1 Total dividend payout RM 1 60000 shares RM 60000 After ... View the full answer