Striker’s Match Company reports the following financial data:

Net earnings $3,000,000 Shares outstanding 1,000,000 Earnings per share $3 Market price per share (ex-dividend) $40 Expected dividend per share $2 Striker is considering distributing $2 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 47,619 shares at a price of $42. 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 plan have on the wealth position of the firm’s shareholders?

b. If most shareholders are in a very high marginal tax bracket, which alternative is favored?

c. What are the limitations on the repurchase alternative as an element of the firm’s dividend policy? P-698