Question

Campbell Corporation is evaluating an extra dividend versus a share repurchase. In either case, $15,000 would be spent. Current earnings are $2.50 per share, and the stock currently sells for $50 per share. There are 4,000 shares outstanding. Ignore taxes and other imperfections. a. Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth per share.

Answer 1

$46.25; $50

$50; $50

Step-by-step explanation:

Given that,

Amount spent = $15,000

Current earnings = $2.50 per share

Current selling price = $50 per share

Shares outstanding = 4,000

Alternative 1: Extra dividend

Price per share:

= Current selling price - (Amount spent ÷ Shares outstanding)

= $50 - ($15,000 ÷ 4,000)

= $46.25

Shareholder wealth = $50

Alternative 2: Repurchase

Price per share = $50

Shareholder wealth = $50