Roger Ramjet is the Chief Financial Officer for Moreton Bell Securities Ltd., a company listed on the Australian Securities Exchange (ASX). He has been asked by the Board of Directors to assess the following alternative proposals for the company;

1. a)using $400,000 of company earnings to pay cash dividends of $1 per share, or
2. b)buy back existing shares from shareholders for $21 per share.

Roger has asked Ms. Nigella Lawton, a recent Finance Graduate from the revered Flannders University Business School to assist him in his evaluation. Nigella has gathered the following current financial information regarding Moreton Bell Securities Ltd.:

Detail

Number of issued shares 400,000

Earnings available to shareholders$800,000

Current share price $20

Price / Earnings (P/E) Ratio 10

a)Using the funds that would have gone to pay the cash dividend, approximately how many shares can be repurchased by Moreton Bell Securities Ltd. at the $21-per-share price?

b)Whatwould be the company's Earnings Per Share (EPS) after therepurchase?

Explain your calculations by comparing with the EPS before the repurchase and discussing the reasons for the outcome.

c) In general, what are the differences, if any, in taxation outcomes for an Australian investor either receiving a dividend from an Australian publicly listed company, or participating in a share buyback?

d)Assuming the company's existingP/E Ratio remains constant after the repurchase, calculate the market price of Moreton Bell Securities Ltd. shares. Explain your answer by comparing with the share price before the repurchase and discuss the reasons for the outcome.

e)What are the implications for the company if the above price outcomes were to occur in practice? From your understanding of underlying finance theory, what issues are likely to create doubt as to the likelihood of the above outcome actually occurring?