Big Industries has the following market-value balance sheet. The stock currently sells for $20 a share, and there are 1,300 shares outstanding. The firm will either pay a $1 per share dividend or repurchase $1,300 worth of stock. Ignore taxes.   Assets   Liabilities and Equity   Cash $ 8,000   Debt $ 11,500   Fixed assets   29,500   Equity   26,000       a. What will be the subsequent price per share if the firm pays a dividend? b. What will be the subsequent price per share if the firm repurchases stock? (Round your answer to the nearest dollar.) c. If total earnings of the firm are $32,300 a year, find earnings per share if the firm pays a dividend. (Do not round intermediate calculations. Round your answer to 3 decimal places.) d. If total earnings of the firm are $32,300 a year, now find earnings per share if the firm repurchases stock. (Do not round intermediate calculations. Round your answer to 3 decimal places.) e. If total earnings of the firm are $32,300 a year, find the price-earnings ratio if the firm pays a dividend. (Do not round intermediate calculations. Round your answer to 2 decimal places.) f. If total earnings of the firm are $32,300 a year, find the price-earnings ratio if the firm repurchases stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.) g. Adherents of the “dividends-are-good” school sometimes point to the fact that stocks with high dividend payout ratios tend to sell at above-average price-earnings multiples. Is Big Industries’ P/E ratio higher if it pays a dividend?

Question

Big Industries has the following market-value balance sheet. The stock currently sells for $20 a share, and there are 1,300 shares outstanding. The firm will either pay a $1 per share dividend or repurchase $1,300 worth of stock. Ignore taxes.

 

Assets   Liabilities and Equity  
Cash $ 8,000   Debt $ 11,500  
Fixed assets   29,500   Equity   26,000  
 

 

a. What will be the subsequent price per share if the firm pays a dividend?

b. What will be the subsequent price per share if the firm repurchases stock? (Round your answer to the nearest dollar.)

c. If total earnings of the firm are $32,300 a year, find earnings per share if the firm pays a dividend. (Do not round intermediate calculations. Round your answer to 3 decimal places.)

d. If total earnings of the firm are $32,300 a year, now find earnings per share if the firm repurchases stock. (Do not round intermediate calculations. Round your answer to 3 decimal places.)

e. If total earnings of the firm are $32,300 a year, find the price-earnings ratio if the firm pays a dividend. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

f. If total earnings of the firm are $32,300 a year, find the price-earnings ratio if the firm repurchases stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

g. Adherents of the “dividends-are-good” school sometimes point to the fact that stocks with high dividend payout ratios tend to sell at above-average price-earnings multiples. Is Big Industries’ P/E ratio higher if it pays a dividend?

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