Q4 (20 marks)

(Assuming there are no transaction costs, taxes, or other market imperfections) Camilla, Ltd. is financed 100% with equity. The firm has 100,000 shares of stock outstanding with a market price of $5 per share. Total earnings for the most recent year are $50,000. The company has cash of $25,000 more than what is necessary to fund its positive NPV projects. The firm is considering using the cash to pay an extra dividend of $25,000 or, alternatively, to repurchase $25,000 of stock. The firm has other assets worth $475,000 (market value).

1. After the payment of cash dividend, what will be the firms earnings per share?

2. How would the situation change if it were a leveraged company according to M$M theory?