PEARSON Practice: Section 13.1 Score: 0 of 1 pt x Question 1: Problem 13.LO1.1 (
ID: 2784161 • Letter: P
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PEARSON Practice: Section 13.1 Score: 0 of 1 pt x Question 1: Problem 13.LO1.1 (similar to) Save 1 of 1 Question Help Settings He en Packard has $38 of excess cash and s considering i t bi ng·with either a specia d de d or a stock repurchase The stock b tad g for S16 share and there an·7B shares outstanding Sarah has 100 shares of Hewlett Packard She bought the shares for $16 per share Sarah wants the cash distribution Assume Sarah pays a 20% tax rate on capital gains and rate of 37% ondividends a. If HP offers a special dividend then what is Sarah's total afer-tax weath (the sun of her cash and sharcholdings) after the dividend b. If HP repurchases shares, then E will pay the pre-repurchase price. What is Sarah's total ather-ax wealth(the sum of her cash and shareholdings) after the repurchase? Assume that Sarah sells the same propartion of shares as HP repurchases and that she receives the sanse price that HIP pays c. Which mehod of disribution does Sarah prefer? a.Sarah's total afher-tax wealth after the dividend is S(Round to nearest dolar)Explanation / Answer
a. Dividend per share= Total dividend/shares outstanindg= 3B/2B= 1.5 per share
Sarah dividend= sarah shareholding* dividend per share= 100*1.5= 150
Tax on dividend= 150*37%= 55.5
Cash flow after tax= 150-55.5= 94.5
Value of stock holding of sarah= 100*16= 1600
Wealth of sarah= 1600+94.5= 1694.5
b. Since sarah purchased shares at 16, and the company also pays 16 per share on repurchase, there will be no capital gain. Hence total wealth of sarah will not change as a result of share repurchase and wealth = 1600 only which is the value of stock she was having.
c. since wealth is high in dividend plan, for sarah dividend distribution is better.
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