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
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. The stock will go ex-dividend tomorrow. Now suppose that instead of paying a dividend, Good Values plans to repurchase $10,000 worth of stock. (Round your answers to the nearest whole dollar.) a. What will be the stock price before and after the repurchase? b. For this part, use the dividend tax rate of 26.2% and assume that capital gains are not taxed. The after-tax price today will be $48.69. Is the value of the firm higher or lower if it pursues the share repurchase instead of the dividend? c. For this part, use the dividend tax rate from your answer to part (b) in problem 14 and assume that capital gains are not taxed. Is the value of the firm higher or lower if it pursues the share repurchase instead of the dividend?
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