You purchased 500 shares in Div Choice, Inc. several years ago for $20. The company previously announced it will be distributing cash to shareholders as follows. First, the company will have a tender offer stock repurchase at $30 per share. After the repurchase, it will issue a special dividend of $5.00 per share to the remaining stockholders. Suppose that you want to convert your holdings in Div Choice, Inc. into cash. Assume the tax on dividends is 30 percent and the tax on capital gains is 15 percent. The shares are currently trading for $30. Assume no new information comes out about the company. Approximately, how much will you receive by waiting until after the ex-dividend day and then selling the shares in the market? (Do not round intermediate calculation. Round your final answer to the nearest dollar.)

Question

Quizplus · Accepted Answer

The total amount received from the stock repurchase will be $15,000 (500 shares x $30 per share). After the repurchase, there will be 250 shares remaining (500 shares - 250 shares repurchased), and you will receive a special dividend of $5.00 per share, which amounts to $1,250 (250 shares x $5 per share). However, 30% of the dividend will be taxed, leaving you with $875 ($1,250 x 0.7). Selling the remaining 250 shares in the market after the ex-dividend day will net you $7,188 ((250 shares x $30 per share) x 0.85). Adding the $875 from the special dividend gives you a total of $8,063. Therefore, the answer is C, you will receive about $14,513 by selling after the ex-dividend day.

You Purchased 500 Shares in Div Choice, Inc