Use the following information to answer the question(s)below.
Suppose that all capital gains are taxed at a 20% rate,and that the dividend tax rate is 40%.Rearden Metal is currently trading for $40 per share,and is about to pay a $5 special dividend.
-Suppose that Rearden Metal made a surprise announcement that it would do a share repurchase rather than pay a special dividend.The net tax savings per share for an investor that would result from this decision is closest to:
A)$1.25.
B)$3.75.
C)$4.00.
D)$5.00.

Question

Quizplus · Accepted Answer

The tax on the $5 dividend would be $5 * 40% = $2. If the company does a share repurchase instead, the investor would pay a 20% capital gains tax, resulting in a tax of $5 * 20% = $1. The net tax savings per share would be $2 - $1 = $1.25.

Use the Following Information to Answer the Question(s)below