Striker’s Match Company reports the following financial data: Net earnings $4,000,000 Shares outstanding 800,000 Earnings per share $5 Market price per share (ex-dividend) $40 Expected dividend per share $3 Striker is considering distributing $3 million to existing stockholders, either as cash dividends or through the repurchase of outstanding shares. The repurchase plan is favored by some of the company’s wealthiest and most influential stockholders. If the shares are repurchased, the company would make a tender offer for 69,767 shares at a price of $43. Alternatively, the firm could pay a $3 dividend, after the payment of which each share would sell for $40. Ignoring taxes, what impact does the choice of a dividend payment or share repurchase plan have on the wealth position of the firm’s shareholders? Impact of a dividend payment: the wealth position of the stockholders -Select-remains unchanged / increases / declines . Impact of share repurchase plan: the wealth position of the stockholders -Select-remains unchanged / increases / declines. If most shareholders are in a very high marginal tax bracket, which alternative is favored? -Select-The share repurchase / The dividend payment will be preferred by high tax bracket stockholders. What are the limitations on the repurchase alternative as an element of the firm’s dividend policy? The regular repurchase of stock may result in taxes -Select-being paid immediately / being postponed.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Hello. I need help with the following question please.

Striker’s Match Company reports the following financial data:


Net earnings	$4,000,000
Shares outstanding	800,000
Earnings per share	$5
Market price per share (ex-dividend)	$40
Expected dividend per share	$3

Striker is considering distributing $3 million to existing stockholders, either as cash dividends or through the repurchase of outstanding shares. The repurchase plan is favored by some of the company’s wealthiest and most influential stockholders.

If the shares are repurchased, the company would make a tender offer for 69,767 shares at a price of $43. Alternatively, the firm could pay a $3 dividend, after the payment of which each share would sell for $40.

Ignoring taxes, what impact does the choice of a dividend payment or share repurchase plan have on the wealth position of the firm’s shareholders?
Impact of a dividend payment: the wealth position of the stockholders -Select-remains unchanged / increases / declines .
Impact of share repurchase plan: the wealth position of the stockholders -Select-remains unchanged / increases / declines.
If most shareholders are in a very high marginal tax bracket, which alternative is favored?
-Select-The share repurchase / The dividend payment will be preferred by high tax bracket stockholders.
What are the limitations on the repurchase alternative as an element of the firm’s dividend policy?
The regular repurchase of stock may result in taxes -Select-being paid immediately / being postponed.

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