How Stock Repurchases Differ from Dividends: You Purchased 500 Shares

question 68

Multiple Choice

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?

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

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Definitions:

Premature

Occurring or done before the usual or proper time; too early.

Incubator

A device providing controlled environmental conditions for the care and growth of premature babies or the cultivation of microbiological cultures.

Neonatal ICU

A specialized unit within a hospital dedicated to the intensive care of ill or premature newborn infants.

Attachment

An emotional bond between individuals, particularly between a child and caregiver, which is critical for the child's development and psychological security.