In your role as a consultant at a wealth management firm you have been assigned a very powerful client who holds one million shares of Netflix. In researching Netflix, you discovered that they are holding a large amount of cash. Additionally, your client is upset that the Netflix stock price has been somewhat stagnant as of late. The client is considering approaching the Board of Directors with a plan for half of the cash the firm has accumulated, to be utilized for a share repurchase or to be paid out as a special dividend. You have been asked to determine which initiative would generate the greatest amount of money both before and after taxes, assuming that with a share repurchase your client would keep the same proportion of ownership. Because both dividends and capital gains are taxed at the same rate (20%),I your client has assumed that there is no difference between the repurchase and the dividend. Assume that you have been asked to evaluate the relative merits of both the special dividend and share market buy back How will each proposal affect the firm's share price? How will it affect the value of the company? Under what conditions will investor have a tax preference for share repurchases rather than dividends? Explain. How do corporate taxes affect the decision of a firm to retain excess cash rather than use it to pay down debt and or make a distribution to equity-holders? Explain. What is dividend signaling and how does it affect a firm's payout policy? What market imperfection is driving this outcome? What other factors may be useful in making the payout/dividend decision in this case? In your role as a consultant at a wealth management firm you have been assigned a very powerful client who holds one million shares of Netflix. In researching Netflix, you discovered that they are holding a large amount of cash. Additionally, your client is upset that the Netflix stock price has been somewhat stagnant as of late. The client is considering approaching the Board of Directors with a plan for half of the cash the firm has accumulated, to be utilized for a share repurchase or to be paid out as a special dividend. You have been asked to determine which initiative would generate the greatest amount of money both before and after taxes, assuming that with a share repurchase your client would keep the same proportion of ownership. Because both dividends and capital gains are taxed at the same rate (20%),I your client has assumed that there is no difference between the repurchase and the dividend. Assume that you have been asked to evaluate the relative merits of both the special dividend and share market buy back How will each proposal affect the firm's share price? How will it affect the value of the company? Under what conditions will investor have a tax preference for share repurchases rather than dividends? Explain. How do corporate taxes affect the decision of a firm to retain excess cash rather than use it to pay down debt and or make a distribution to equity-holders? Explain. What is dividend signaling and how does it affect a firm's payout policy? What market imperfection is driving this outcome? What other factors may be useful in making the payout/dividend decision in this case
