Asked by Mbilla Mwololo on Jun 06, 2024
Verified
Alex, Inc. 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 firm has cash of $25,000 in excess of 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) . For each of the questions that follow, assume there are no transaction costs, taxes, or other market imperfections. Assume the firm pays the $25,000 excess cash in the form of a cash dividend. What will be the firm's earnings per share once the dividend is paid?
A) $0.25
B) $0.39
C) $0.45
D) $0.50
E) $0.53
Excess Cash
Funds that exceed the normal operational needs of a business, which may be used for investment or other purposes.
Earnings Per Share
A financial metric that calculates the portion of a company's profit allocated to each outstanding share of common stock, indicating the company's profitability.
- Quantify dividends and realize the outcomes of dividend schemas on enterprise metrics.
- Measure the earnings allocated per share before and after the execution of corporate measures like dividends issuance, share buybacks, and splits.
Verified Answer
NM
Nuriddin MakhmudovJun 11, 2024
Final Answer :
D
Explanation :
Paying a dividend does not affect the firm's earnings or the number of shares outstanding. Therefore, the earnings per share (EPS) calculation remains based on the original earnings ($50,000) divided by the original number of shares (100,000), resulting in an EPS of $0.50.
Learning Objectives
- Quantify dividends and realize the outcomes of dividend schemas on enterprise metrics.
- Measure the earnings allocated per share before and after the execution of corporate measures like dividends issuance, share buybacks, and splits.