How Share Buy-Backs Differ from Dividends: You Purchased 500 Shares

question 77

Multiple Choice

How share buy-backs differ from dividends: You purchased 500 shares in Investors Choice, Ltd., 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 share buy-back at $30 per share. After the buy-back, it will issue a special dividend of $5.00 per share to the remaining shareholders. Suppose that you want to convert your holdings in Investors Choice, Ltd., into cash. Assume the tax on dividends is 30 per cent and the tax on capital gains is 15 per cent. 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 buy-back?

• A) You will receive $14,250 by taking part in the buy-back.
• B) You will receive $15,000 by taking part in the buy-back.
• C) You will receive $15,750 by taking part in the buy-back.
• D) You will receive $16,000 by taking part in the buy-back.

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Definitions:

Debits And Credits

The two sides of accounts in double-entry bookkeeping; debits represent increases in assets or expenses and decreases in liabilities or equity, while credits do the inverse.

Slide

An error in which the entire number is moved one or more spaces to the right or the left, such as writing $542.00 as $54.20 or $5,420.00.

Accounting Equation

A fundamental principle of accounting expressing the relationship between assets, liabilities, and equity.

Decreases

A reduction in the size, quantity, or importance of something.