Salmon Arm Corporation is evaluating an extra dividend versus a share repurchase. In either case, $11,000 would

Question:

Salmon Arm Corporation is evaluating an extra dividend versus a share repurchase. In either case, $11,000 would be spent. Current earnings are $1.40 per share, and the stock currently sells for $58 per share. There are 2,000 shares outstanding. Ignore taxes and other imperfections in answering the first two questions.

a. Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth.

b. What will be the effect on Salmon Arm’s EPS and PE ratio under the two different scenarios?

c. In the real world, which of these actions would you recommend? Why?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...