Reading 33- LOS b ～ Q1 wealth, impact, amount, class

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.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 always 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 cash dividend will lead to a higher total shareholder wealth than a share repurchase.

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

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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 always 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 cash dividend will lead to a higher total shareholder wealth than a share repurchase.

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

Click for Answer and Explanation B)

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.