The following financial data on the Bond Recording Company are available: Earnings available for common stockholders ...$800,000

Question:

The following financial data on the Bond Recording Company are available:

Earnings available for common stockholders ...$800,000

Number of shares of common stock outstanding ..400,000

Earnings per share ($800,000 ÷ 400,000) ..........$2

Market price per share .................$20

Price/earnings (P/E) ratio ($20 ÷ $2) .........10

The firm is currently considering whether it should use $400,000 of its earnings to pay cash dividends of $1 per share or to repurchase stock at $21 per share.

a. Approximately how many shares of stock can the firm repurchase at the $21-pershare price, using the funds that would have gone to pay the cash dividend?

b. Calculate the EPS after the repurchase. Explain your calculations.

c. If the stock still sells at 10 times earnings, what will the market price be after the repurchase?

d. Compare the pre- and post-repurchase earnings per share.

e. Compare and contrast the stockholders’ positions under the dividend and repurchase alternatives. What are the tax implications under each alternative?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...