Reference no: EM131333981
The following financial data are available for Magna Ltd:
Earnings available for common stockholders $500,000
Number of common stock outstanding 500,000
Earnings per share (EPS) $1.00
Market price per share $10.00
Price/earnings (P/E) ratio 10
The firm is currently contemplating using $200,000 of its earnings to either pay cash dividends or to buy back shares at $10.40 per share.
A. Approximately how many shares can the firm repurchase at the $10.40 per share price using the funds that would have gone to pay the cash dividend?
B. Calculate the EPS after the repurchase.
C. If the share still sells at 10 times earnings, how much will the market price per share be after the repurchase?
D. Ignoring the possible tax implications, briefly compare the financial benefit to shareholders under the dividend and repurchase alternatives.
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