Reference no: EM132183921
Question - DB, Inc. is publicly traded with a stock price of $60 per share and 200,000,000 shares outstanding. It also expects to have earnings of $200,000,000. DB has $1 billion in surplus cash that it wants to pay to shareholders. One option is to pay a special dividend.
The other option is to repurchase stock with the cash. Evaluate the two alternatives below (ignoring any information effects):
a. What is the price of the company's stock if it announces
i. a special dividend will paid (with all $1 billion).
ii. stock will be repurchased (totaling $1 billion) on the open market.
b. What is the EPS of the company if it
i. pays a special dividend with all $1 billion.
ii. repurchases stock totaling $1 billion on the open market.
c. What is the P/E ratio of the company if it
i. pays a special dividend with all $1 billion
ii. repurchases stock totaling $1 billion on the open market
d. Give two reasons why the company should choose to pay the special dividend and two reasons why the company should repurchase the stock.