How stock repurchases differ from dividends: 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 a 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. How much cash will you receive from taking part in the repurchase?

Question

Quizplus · Accepted Answer

The correct answer is A. You will receive $14,250 by taking part in the repurchase.Explanation:If you take part in the repurchase, you will receive $30 per share for your 500 shares, which totals $15,000. However, you will have to pay taxes on the capital gain of $10 per share, which is $5,000. After taxes, you will receive $14,250.

How Stock Repurchases Differ from Dividends: You Purchased 500 Shares