3 1 Q3 A firm is debating whether to conduct a share repurchase or pay a special dividend with $300,000 cash. Current EPS is $0.50 per share, and there are 1,000,000 shares outstanding, so total net income is $500,000. Shares currently sell for $10 each, so the current P/E ratio is 20. You own exactly 1,000 shares. a) If the firm makes the special dividend payment, what will your total wealth be? b) If the firm repurchases shares, how many shares will be repurchased, and what will your total wealth be? c) If the firm makes the special dividend payment, what will the new P/E ratio be? 5 d) If the firm repurchases shares, what will the new EPS be? B 7 B 9 0 1 e) If the firm repurchases shares, what will the new P/E ratio be? 2 3 4 5 6 f) From your perspective as an investor, would your prefer a special dividend or a share repurchase? Why? #7