Laughingtree Ltd. is considering rewarding its shareholders with a total of $40,000. There are 10,000 shares outstanding. Currently the EPS is $2 per share and the stock is selling for $60 per share.

i) What would be the effect on per share stock price and shareholders' wealth if the company decided to pay dividends? What would happen if it went for a share repurchase instead? Ignore taxes.

ii) What would be the impact of a dividend on the company's P/E? What will it be if there was a repurchase?

iii) Under the given scenario, which alternative would you want the firm to choose: A dividend or a repurchase? Why?