Reading 29: Dividends and Dividend Policy-LOS b 习题精选 amount, class, impact, 2010, center

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Session 8: Corporate Finance
Reading 29: Dividends and Dividend Policy

LOS b: Compare the impact on shareholder wealth of a share repurchase with a cash dividend of equal amount.

 

 

 

What is the impact on shareholder wealth of a share repurchase and a cash dividend of equal amount when the tax treatment of the two alternatives is the same?

A) A share repurchase will sometimes lead to higher total shareholder wealth than a cash dividend of an equal amount.

B) A share repurchase is equivalent to a cash dividend of an equal amount, so total shareholder wealth will be the same.

C) A share repurchase will always lead to higher total shareholder wealth than a cash dividend of an equal amount.

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Assuming that the tax treatment of a share repurchase and a cash dividend of equal amount is the same, a share repurchase is equivalent to a cash dividend payment, and shareholder wealth will be the same.

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Pearl City Breweries has 8 million shares outstanding that are currently trading at $34 per share. The company is choosing whether to distribute $22 million as dividends or to use the same amount to repurchase its shares. Ignoring tax effects, what will be the amount of total wealth from owning one share of Pearl City Breweries under each of these alternatives?

Cash dividend

Share repurchase

A) $34.00 $34.00

B) $31.25 $37.00

C) $31.25 $34.00

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If the company pays a cash dividend, the dividend per share will be $22 million/8 million = $2.75. The value of its shares will be:

So the total wealth from owning one share will be $31.25 + $2.75 = $34.00.

If the company repurchases shares, it can buy $22 million/$34 = 647,058 shares. The value of one share would then be:

If you remember that both a cash dividend and a share repurchase for cash leave shareholder wealth unchanged, this question does not require calculations of the amounts.

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The following information is from the 10-k of Laura’s Chocolates, Inc.(LC), a maker of nut-based toffees.

Cash	25,000,000
Share price	40.00
Shares outstanding (prior to transaction)	20,000,000

LC decides to spend $20 million repurchasing common stock. What is the value of a share of stock after the share repurchase?

A) 40.00.

B) 35.00.

C) 45.00.

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