1. Flychucker Corporation is evaluating an extra dividend versus a share repurchase.

In
either case $9,000 would be spent. Current earnings are $1.30 per share and the stock
currently sells for $64 per share. There are 1000 shares outstanding. Ignore taxes and
other imperfections in answering the first two questions
a- Evaluate the two alternatives in terms of the effect on the price per share of the stock and
shareholder wealth.
b- What will be the effect on Flychuckers EPS and PE ratio under the two different
scenarios?
c- In real world, which of these actions would you recommend? Why?

2. Big industries has the following market-value balance sheet. The stock currently sells for
$20 a share and there are 1,000 shares outstanding. The firm will either pay a $1 per share
dividend or repurchase $1,000 worth of stock. Ignore the taxes
Assets
Cash
Fixed Assets

$2,000
28,000

Liabilities and Equity

Debt
Equity

$10,000
20,000

a- What will be the subsequent price per share under each alternative (dividend versus
repurchase?
b- If total earnings of the firm are $2,000 a year, find earnings per share under each
alternative.
c- Find the price-earnings ratio under each alternative.

3. Your company wants to purchase a new network file server for its wide-area
computer network. The server costs $75,000. It will be completely obsolete in three
years. Your options are to borrow the money at 10% or to lease the machine. If you
lease, the payment will be $27,000 per year, payable at the end of each of the next
three years. If you buy the server, you can depreciate it straight-line to zero over
three years. The tax rate is 34 percent. Should you lease or buy?
4. The wildcat oil company is trying to decide whether to lease or buy a new computer-

assisted drilling system for its oil exploration business. Management has decided that
it must use the system to stay competitive to stay competitive; it will provide $1.75
million in annual pretax cost saving. The system costs $8 million and will be the

depreciated straight-line to zero over 5 years. Wildcats tax rate is 34 percent and the
firm can borrow at 9 percent. Lambert leasing company has offered to lease the
drilling equipment to Wildcat for payment of $ 1.9 million per year. Lamberts policy
is to require its lessees to make payment at the start of the year. What is NAL for
wildcard?