Striker's Match Company reported the following financial data:
Net Earnings ...............................................$3,000,000
Share outstanding .........................................1,000,000
Earnings/share .........................................................$ 3
Market price/share
(ex dividend) ...........................................................$40
Expected dividend per share ....................................$ 2
Striker is considering distributing $2 million to existing stockholders either as a cash dividend or through the repurchase of outstanding shares. Some of the company is wealthiest and most influential stockholders favor the repurchase plan. If the shares are repurchased, the company would make a tender offer for 47,619 shares at a price of $42 a share. Alternatively, the firm could pay a $2 dividend, after the payment of which each share would sell for $40.
a. Ignoring taxes, what impact does the choice of a dividend payment or share repurchase have on the wealth of the firm's stockholders? (12 points)
b. If most of the shareholders are in a very high marginal tax bracket, which alternative is favored? Why? (4 points)
c. What are the limitations on the repurchase alternative as an element of the firm's dividend policy? (4 points)