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Taco Time Corporation is evaluating an extra dividend versus a share repurchase. In either case, $19,240 would be spent. Current earnings are $3.40 per share, and the stock currently sells for $88 per share. There are 3,700 shares outstanding. Ignore taxes and other imperfections. What will the company’s EPS and PE ratio be under the two different scenarios?

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abiolataiwo2015

Answer:

24.37

Explanation:

Dividend per Share = $19,240/ 3,700

Dividend per Share = $5.2

Stock Price per share after Dividend payment = $88 - $5.2

Stock Price per share after Dividend payment = $82.8

Earnings per Share = $3.40

P/E Ratio = Price per Share / Earnings per Share

P/E Ratio = $82.8/ $3.40

P/E Ratio = 24.35

Share Repurchase:

Shares repurchased = $19,240/ $88

Shares repurchased = 218. 63 Shares

Earnings per Share before Share repurchase = $3.40

Total Earnings = $3.40* 3,700 = $12,580

Earnings per Share after Share repurchase = $12,580/ (3,700 – 218.63)

=$12,580/3,481.37

Earnings per Share after Share repurchase = $3.61

P/E Ratio = Price per Share / Earnings per Share

P/E Ratio = $88/ $3.61

P/E Ratio = 24.37

Therefore the company’s EPS and PE ratio be under the two different scenarios will be

24.37

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