A company has 35 mil shares outstanding with a current market price of $49.75 per share. the company has maintained $1 per share quaterly dividend for several years, but for the next quarter mgt is considering whether to implement a $35 mil share repurchase in place of the regular quaterly dividend. Assum the shares are held in a tax-deferred account, so that the tax treatments of either alternative are teh same, what is the net impact on the wealth of shareholders if the next cash dividend is replaced by the share repurchase? A.-100.000 B.14.52 C.0 D.85.48 Ans: C. Can somebody explain why? Thanks!
shareholders get $35mil either way, so the net effect is zero
yeah , right, i was thinking of calculating the impact on the prices. thanks!
i think the idea is that net income doesn’t change and div are distributed in a different form but with no real effect because they are tax neutral
Look at it from the other side: if the two are not equivalent (in the absence of taxes), then you are effectively altering the value of the company (read: wealth of shareholders) by simply choosing a different method of dividend payout. It’s just smoke and mirrors once you eliminate the effect of taxes.