Omega plc wants to distribute £100,000 to its shareholders and is evaluating an extra dividend versus a share repurchase. The current earnings are £1.60 per share, and the equity sells for £100 per share. There are 2,000 shares outstanding.
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Evaluate the two alternatives in terms of the effect on the price per share of equity and shareholders’ wealth. Assume that there are no taxes and other market imperfections.
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In real world, which of these two actions would you recommend? Explain.