Company C has been paying a regular cash dividend of $4 per share each year for over a decade. The company is paying out all its earnings as dividends and is not expected to grow. There are 100,000 shares outstanding selling for $80 per share. The company has sufficient cash on hand to pay the next annual dividend. Suppose that Company C decides to cut its cash dividend to zero and announce that it will repurchase shares instead. Required:

a) What is the immediate stock price reaction? Ignore taxes, and assume that the repurchase program conveys no information about operating profitability or business risk.

b) How many shares will Company C purchase?

c) If a firm borrows $50 million for one year at an interest rate of 9%, what is the present value of the interest tax shield? Assume a 30% marginal corporate tax rate.

d) Please discuss how dividend policy is affected using clientele effect theory, signal effect theory and tax effect theory.