Ewing Oil has $5B of excess cash and has announced an open market stock repurchase.Prior to the announcement,the stock was trading for $25 per share and there are 2.5B shares outstanding.Assume that the stock repurchase is executed at the pre-repurchase price.Sue Ellen has 100 shares of Ewing Oil.She bought the shares for $25 per share.Sue Ellen pays a tax rate of 20% on capital gains and 34% on dividends.What is Sue Ellen's after-tax wealth if she sells the same proportion of shares as Ewing repurchases,and that she receives the same price that Ewing pays? Assume that Sue Ellen sells her remaining shares after the repurchase at the price that prevails after the repurchase.

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The number of shares that Ewing Oil will repurchase is: N_R = 11ea7fdb_fc55_ad6f_a768_f78eb04858f9_TB2902_11 N_R = 0.2B f = 11ea7fdb_fc55_d480_a768_bb6a942d3e2c_TB2902_11 f = 11ea7fdb_fc55_d481_a768_617ba0c449a2_TB2902_11 f = 0.08 or 8% Sue Ellen will sell 8% of her shares. An open market repurchase executed at the pre-repurchase will leave the stock price at its pre-repurchase level. Thus, P_A = P_B = $25. After the repurchase, Sarah's remaining shares will be worth: Value of Shares = 100 × (1 - 0.08) × $25 - Tax on capital gain Since she sells them for the same price as she purchased them, there is no gain and no tax. After-tax value of remaining shares = $2,300 Sarah sells 10% of shares and the proceeds from the sale are: Sale proceeds before tax = 100 × 0.08 × $25 Sale proceeds before tax = $200 Sarah's tax on the repurchased shares is a capital gains tax: Capital gains tax = (Sale price - purchase price) × T_G Where T_G is her tax rate on capital gains. Since the she sold the shares for $25 and bought them for $25 there is no capital gain and thus no tax. After-tax repurchase income = Sale proceeds before tax - taxes After-tax repurchase income = $250 - $0 After-tax repurchase income = $250 Total wealth = shares + cash Total wealth = $2,300 + $200 Total wealth = $2,500

Ewing Oil Has $5B of Excess Cash and Has Announced