Steve owns 3,000 shares of NOP, Inc. stock, which he purchased six years ago at

Question

Steve owns 3,000 shares of NOP, Inc. stock, which he purchased six years ago at a price of $22 a share. Today, these shares are selling for $68 each. Assume the current tax laws are such that Steve is subject to a tax rate of 25 percent on both his dividend income and his capital gains. From Steve's point of view, a stock repurchase today: (Ignore costs)

a. is equivalent to a cash dividend in all respects. b. will result in the same tax liability as an equivalent cash dividend. c. is more desirable than a cash dividend in respect to taxes. d. is more highly taxed than a cash dividend. e. is totally unacceptable to him.

Explanation / Answer

c. is more desirable than a cash dividend in respect to taxes.

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