Good Values, Inc., is all-equity-financed. The total market value of the firm currently is $100,000, and there are 2,000 shares outstanding. The firm has declared a $5 per share dividend. Now suppose that instead of paying a dividend Good Values plans to repurchase $10,000 worth of stock. Ignore taxes. a. What will be the stock price before and after the repurchase? b. Suppose an investor who holds 200 shares sells 20 of her shares back to the firm. If there are no taxes on dividends or capital gains, show that she should be indifferent between the repurchase and the dividend. c. Show that if dividends are taxed at 30% and capital gains are not taxed, the value of the firm is higher if it pursues the share repurchase instead of the dividend.
Good Values, Inc., is all-equity-financed. The total market value of the firm currently is $100,000, and there are 2,000 shares outstanding. The firm has declared a $5 per share dividend. Now suppose that instead of paying a dividend Good Values plans to repurchase $10,000 worth of stock. Ignore taxes. a. What will be the stock price before and after the repurchase? b. Suppose an investor who holds 200 shares sells 20 of her shares back to the firm. If there are no taxes on dividends or capital gains, show that she should be indifferent between the repurchase and the dividend. c. Show that if dividends are taxed at 30% and capital gains are not taxed, the value of the firm is higher if it pursues the share repurchase instead of the dividend.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Good Values, Inc., is all-equity-financed. The total market value of the firm currently is $100,000, and there are 2,000 shares outstanding. The firm has declared a $5 per share dividend. Now suppose that instead of paying a dividend Good Values plans to repurchase $10,000 worth of stock. Ignore taxes. a. What will be the stock price before and after the repurchase? b. Suppose an investor who holds 200 shares sells 20 of her shares back to the firm. If there are no taxes on dividends or capital gains , show that she should be indifferent between the repurchase and the dividend. c. Show that if dividends are taxed at 30% and capital gains are not taxed , the value of the firm is higher if it pursues the share repurchase instead of the dividend.
Transcribed Image Text:Good Values, Inc., is all-equity-financed. The total
market value of the firm currently is $100,000, and
there are 2,000 shares outstanding. The firm has
declared a $5 per share dividend. Now suppose that
instead of paying a dividend Good Values plans to
repurchase $10,000 worth of stock. Ignore taxes. a.
What will be the stock price before and after the
repurchase? b. Suppose an investor who holds 200
shares sells 20 of her shares back to the firm. If there
are no taxes on dividends or capital gains, show that
she should be indifferent between the repurchase
and the dividend. c. Show that if dividends are taxed
at 30% and capital gains are not taxed, the value of
the firm is higher if it pursues the share repurchase
instead of the dividend.
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