Impact of Capital Allocation on Financial Ratios

Very Hard Dividends And Repurchases Impact On Financial Ratios

A company, ABC Corp, is considering its capital allocation strategy for the upcoming financial year. The company has the following characteristics:

- Current Stock Price: $50

- Earnings per Share (EPS): $5

- Dividend Payout Ratio: 40%

- Total Equity: $1,000,000

ABC Corp is contemplating a share repurchase program of $200,000 or increasing its dividends by the same amount. The CFO is particularly concerned about how these alternatives will affect key financial ratios such as Return on Equity (ROE), Earnings Per Share (EPS), and the Dividend Yield. Following the implementation of either alternative, what would be the most accurate statement regarding the change in financial ratios?

Implementing a share repurchase will increase EPS but may decrease ROE depending on the effect on total equity.

Increasing dividends will lead to a proportional increase in both EPS and ROE.

Both alternatives will decrease the Dividend Yield.

Hint

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