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. Now suppose that instead of paying a dividend Good Values plans to repurchase $10,000 worth of stock. Ignore taxes. a. What will be the stock price before and after the repurchase? b. Suppose an investor who holds 200 shares sells 20 of her shares back to the firm. If there are no taxes on dividends or capital gains, show that she should be indifferent between the repurchase and the dividend. c. Show that if dividends are taxed at 30% and capital gains are not taxed, the value of the firm is higher if it pursues the share repurchase instead of the dividend. Good Values, Inc., is all-equity-financed. The totalmarket value of the firm currently is $100,000, andthere are 2,000 shares outstanding. The firm hasdeclared a $5 per share dividend. Now suppose thatinstead of paying a dividend Good Values plans torepurchase $10,000 worth of stock. Ignore taxes. a.What will be the stock price before and after therepurchase? b. Suppose an investor who holds 200shares sells 20 of her shares back to the firm. If thereare no taxes on dividends or capital gains, show thatshe should be indifferent between the repurchaseand the dividend. c. Show that if dividends are taxedat 30% and capital gains are not taxed, the value ofthe firm is higher if it pursues the share repurchaseinstead of the dividend.

The value of the firm derives from the value of shares. It depends upon the repurchase decisions as…

Answered: Good Values, Inc., is…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 12P

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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. Now suppose that instead of paying a dividend Good Values plans to repurchase $10,000 worth of stock. Ignore taxes. a. What will be the stock price before and after the repurchase? b. Suppose an investor who holds 200 shares sells 20 of her shares back to the firm. If there are no taxes on dividends or capital gains, show that she should be indifferent between the repurchase and the dividend. c. Show that if dividends are taxed at 30% and capital gains are not taxed, the value of the firm is higher if it pursues the share repurchase instead of the dividend.

Definition Definition Tax imposed by the government on the "gain" or increase in the value of an asset at the time of its sale by the owner. Capital gain is computed based on the purchase price and sale price of the asset. If the sale price of the asset is more than the purchase price, there is a gain on the sale of asset. A tax is imposed on such gain in accordance with the applicable tax rates at the time of sale.

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