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.
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.
In real world, which of these two actions would you recommend? Explain.