Hazel, Emily, and Frank, Unrelated Individuals, Own All of the Stock

question 21

Multiple Choice

Hazel, Emily, and Frank, unrelated individuals, own all of the stock in Wren Corporation (E & P of $1.2 million) as follows: Hazel, 1,300 shares; Emily, 400 shares; and Frank, 300 shares.Wren redeems 300 of Hazel's shares (basis of $60,000) for $450,000.With respect to the distribution in redemption of the stock:

• A)Hazel has a capital gain of $390,000.
• B)Hazel has dividend income of $450,000.
• C)Hazel has dividend income of $390,000.
• D)Hazel has a capital gain of $450,000.
• E)None of the above.

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Definitions:

Subsidy

Financial aid supplied by the government to an industry or business, with the aim of keeping prices low for consumers or aiding the business to be competitive.

Efficiency Loss

Economic costs that arise when market equilibrium is not achieved, or when resources are not allocated optimally, leading to waste or suboptimal outcomes.

Deadweight Loss

The loss of economic efficiency that occurs when the equilibrium for a good or service is not achieved or is not achievable.

Marginal Cost

The extra expense associated with manufacturing an additional unit of a product or service.