You purchased 500 shares in Div Choice, Inc. several years ago for $20. The company previously announced it will be distributing cash to shareholders in a novel way. 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

If you sell your 500 shares back to the company during the tender offer, you will receive ($30-$20) x 500 = $5,000. After you pay the 15% capital gains tax, you will have $4,250 remaining. If you hold onto the remaining 500 shares, you will receive a special dividend of $5.00 per share, or $2,500 total. After you pay the 30% tax on the dividend, you will have $1,750 remaining. When you sell your 500 remaining shares after the ex-dividend day for $30 per share, you will receive $15,000. After you pay the 15% capital gains tax, you will have $12,750 remaining. So the total amount you will receive by waiting until after the ex-dividend day and then selling the shares in the market is $4,250 + $1,750 + $12,750 = $18,750. Rounded to the nearest dollar, the answer is choice C: You will receive about $14,513 by selling after the ex-dividend day.

You Purchased 500 Shares in Div Choice, Inc