42. The following financial data are available for Magna Ltd:

Earnings available for common stockholders Number of common stock outstanding Earnings per share (EPS)

Market price per share

Price/earnings (P/E) ratio

$500,000 500,000 $1.00 $10.00 10

The firm is currently contemplating using $200,000 of its earnings to either pay cash dividends or to buy back shares at $10.40 per share.

Required:

1. Approximately how many shares can the firm repurchase at the $10.40 per share price using the funds that would have gone to pay the cash dividend? [1 mark]
2. Calculate the EPS after the repurchase. [2 marks]
3. If the share still sells at 10 times earnings, how much will be the market
4. price per share after the repurchase? [1 mark]
5. Ignoring the possible tax implications, briefly compare the financial benefit to shareholders under the dividend and repurchase alternatives.