Good Values, Inc., is all-equity-financed. The total market value of the firm currently is $100,000, and there

Question:

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.

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...