Alex, Inc Is fiNanced 100% with Equity

question 163

Multiple Choice

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 price/earnings ratio once the dividend is paid?

• A) 9.00
• B) 9.25
• C) 9.50
• D) 9.75
• E) 10.00

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