A firm has earnings available to common stock holders of $2million and has 500,000 shares of common outstanding. The stocksells for $62/share. The firm is contemplating the payment of$2/share in cash dividends to its 500,000 stockholders. Mr. Lu, itsCFO suggests that they should use the total amount of cash dividendand buy-back their stock thus helping its stockholders. If the firmcan repurchase stock at $62/share, (a) how many shares can bepurchased in lieu of making dividend payment; (b) How much will theEPS be before and after the repurchase? (c) If the P/E ratio of 15remains the same what will be the market price after therepurchase?
A firm has earnings available to common stock holders of $2million and has 500,000 shares of common
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