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Lyle Communications had finally arrived at the point where it had a sufficient excess cash flow of $2.4 million to consider paying a dividend. It had 2 million shares outstanding and was considering paying a cash dividend of $1.20 per share. The firms total earnings were $8 million, providing $4 in EPS. Lyle Communications shares traded in the market at $64. However, Liz Crocker, the chief financial officer, was not sure that paying the cash dividend was the best route to go. She had recently read a number of articles in The Globe and Mail about the advantages of stock repurchases and, before she made a recommendation to the board of directors, she decided to do a few calculations.

1. What is the firms P/E ratio?

2. If the firm paid the cash dividend, what would be its dividend yield and dividend payout per share?

3. If a shareholder held 100 shares and received the cash dividend, what would be the total value of the shareholders portfolio?

4. Assume that instead of paying the cash dividend, the firm used the $2.4 million of excess funds to purchase shares at $65.20, slightly over the current market price. How many shares could be repurchased? (Round to the nearest share.)

5. What would be the new EPS under the share repurchase alternative?

6. If the P/E ratio stayed the same under the share repurchase alternative, what would be the share value? What would be the value of the shareholders portfolio, which included 100 shares?

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