The Hang Seng University of Hong Kong FIN 3004 Corporate Finance Assignment 2: Dividends Policy (Chapter 19) Question 1 (13 marks) Altantic King is evaluating an extra dividend versus a share repurchase. In either case $2,500 would be spent. Current earnings are $2.10 per share, and the stock currently sells for $50 per share. There are 1,000 shares outstanding. Ignore taxes and other imperfections in answering parts (a) and (b). a. Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth. (6 marks) b. What will be the effect on Atlantic King's EPS and PE ratio under the two different scenarios? (5 marks) c. Provide ONE reason why you recommend a share repurchase rather than an extra dividend to Atlantic King in reality. (2 marks) Question 2 (7 marks) Sammy Co. has a current cash flow (at time 0) of $5 m and pays no dividends. The present value of the company's future cash flows is $10 m. The firm is entirely financed with equity and has $500,000 shares outstanding. Assume the dividend tax rate is zero. a. What is the share price of Sammy stock? (2 marks) b. Suppose the board of directors of Sammy Co. announces its plan to payout 50% of its current cash flow as dividends to its shareholders. How can Marcus Camp, who owns 500 shares of Sammy stock, achieve a zero payout policy on his own