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Firm ABC stock price is currently $100 and there are 2 million shares outstanding. All investors in firm ABC purchased their stock 5 years ago
Firm ABC stock price is currently $100 and there are 2 million shares outstanding. All investors in firm ABC purchased their stock 5 years ago when the price was $50. ABC is sitting on top of $20 million in extra cash that it does not need to fund its operations. With the exception of possible income from this cash, the earnings of ABC are expected to be constant for the foreseeable future. The corporate tax rate is 35%, the personal tax rate on dividend and interest income is 30%, and the personal tax rate on capital gains is 20%. ABC is considering the following options (a) Pay the $20 million out in a special dividend today to investors who will invest the cash in T- bills offering an 8% return for the next 5 years. (b) Pay the $20 million out in the form of a share repurchase today to investors who will invest the cash in T-bills offering an 8% return for the next 5 years (c) Hold onto the cash and invest it in T-bills offering an 8% return. Pay the cash and interest out to investors in the form of a special dividend after 5 years (d) Hold onto the cash and invest it in T-bills offering an 8% return. Pay the cash and interest out to investors in the form of a share repurchase after 5 years. For simplicity assume the expected stock price at year 5 is expected to remain at $100 Calculate as of year 5 (i.e., exactly 5 years from today) how much of this $20 million and associated interest ends up in investor's pockets after all taxes under each of the above scenariOS
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