2.1 Distinguish between a residual dividend policy and a stable dividend policy.

2.2 Mphela Manufacturing is unsure as to whether to pay out R50 000 in excess cash in the form of an extra dividend or a share repurchase. Current profits are R 2,25 per share and each share sells for R 20.

Their abbreviated balance sheet before paying out the R50 000 dividends is:

Equity 250 000

Debt 50 000

Total Capital 300 000

Cash (50 000)

Other Assets 250 000

Evaluate the two alternatives in terms of the effect on the price per share, earnings per share and Price Earnings Ratio