Question: In 1 984, Burns Ltd. adopted a policy of buying back its own outstanding common stock instead of paying cash dividends. Earnings after taxes for the 4 years 1 984-87 stayed at a constant $8,000,000 and were used exclusively for the repurchase program.

(a) Assuming there were 32,000,000 shares outstanding at the beginning of 1984, and that shares have traded at a stable price/earnings ratio of 16 since then, calculate earnings per share, the market price per share, and the number of shares repurchased for the 4 years 1984 through 1987.

(b) Determine the preference of a shareholder who owns 2,100 shares of Burns Ltd., from 1984 to the end of 1987, for either cash dividends or share repurchases. The shareholder's combined provincial and federal marginal tax rate is 38 percent with her federal tax being 30 percent. The shareholder has exhausted any tax-free amounts that may be available on dividend or capital gains income, so that any investment income that she receives is taxable. Ignore the time value of money and assume that earnings are either fully paid out in dividends or used for share repurchases.