Five years ago,Mr.Martinez purchased 1000 shares of JPM stock at $50 per share.If Mr.Martinez ' tax rate is 25%,would he prefer that the company pay a $5.00 per share dividend or offer to repurchase 100 shares at $50 per share?

Question

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If the company pays a dividend of $5 per share, Mr. Martinez would receive $5,000 in total ($5 x 1000 shares). However, he would also have to pay taxes on that dividend at a rate of 25%, which would be $1,250 ($5,000 x 0.25). This would leave him with a net amount of $3,750.

If the company offers to repurchase 100 shares at $50 per share, Mr. Martinez would receive $5,000 ($50 x 100 shares) without incurring any transaction costs. He would not owe any taxes on this repurchase because it represents a return of his original investment. Therefore, the best choice would be for Mr. Martinez to prefer the company repurchase 100 shares at $50 per share.

Five Years Ago,Mr