Built Rite Corp. is evaluating an extra dividend versus a share repurchase. In either case, $7,500 would be spent. Current earnings are $1.24 per share, and the stock currently sells for $32 per share. There are 5,000 shares outstanding. Ignore taxes and other imperfections. You own one share of stock in this company. If the company issues the dividend, your total investment will be worth ________ as compared to ________ if the company opts for a share repurchase.
A) $30.50; $30.50
B) $27.50; $32.00
C) $27.50; $30.50
D) $27.50; $27.50
E) $32.00; $32.00

Question

Quizplus · Accepted Answer

If the company issues a dividend, you receive the dividend amount, and the stock price decreases by the dividend amount, keeping your total investment value the same. In a share repurchase, the stock price remains the same, and you still hold your share, so your investment value remains unchanged.