Flemington Farms is evaluating an extra dividend versus a share repurchase. In either case, $10,000 would be spent. Current earnings are $2.10 per share, and the stock currently sells for $52 per share. There are 2,000 shares outstanding. Ignore taxes and other imperfections. The PE ratio will be if the firm issues the dividend as compared to if the firm does the share repurchase. Multiple Choice 22.38; 22.38 24.87; 22.38 20.23; 24.87 22.38; 20.23 20.23; 22.38

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abiolataiwo2015 abiolataiwo2015 · Answer 1 · 2021-05-05T02:39:36+02:00

Answer:

A. 22.38; 22.38

Explanation:

Calculation to determine what The PE ratio will be____ if the firm issues the dividend as compared to ____ if the firm does the share repurchase

Calculation to determine PE ratio If the firm issues the dividend:

First step is to calculate the Dividends per share

Dividends per share = $10,000/2,000 shares

Dividends per share= $5.00

Now let calculate the P/E

P/E = ($52-5.00)/$2.10

P/E = 22.38

Calculation to determine the P/E If the firm does the share repurchase:

First step is to calculate the Shares repurchased

Shares repurchased = $10,000/$52

Shares repurchased = 192.31

Second step is to calculate the EPS after repurchase

EPS after repurchase = ($2.10 ×2,000) /(2,000 -192.31)

EPS after repurchase= $2.3234

Now let calculate the P/E

P/E= $52 / $2.3234

P/E= 22.38

Therefore The PE ratio will be 22.38 if the firm issues the dividend as compared to 22.38 if the firm does the share repurchase