Question #12
Reading: Reading 15 Analysis of Dividends and Share Repurchases
PDF File: Reading 15 Analysis of Dividends and Share Repurchases.pdf
Page: 6
Status: Unattempted
Question
What is the impact on shareholder wealth of a share repurchase versus cash dividend of equal amount when the tax treatment of the two alternatives is the same?
Answer Choices:
A. A share repurchase will sometimes lead to higher total shareholder wealth than a cash dividend of an equal amount
B. A share repurchase will always lead to higher total shareholder wealth than a cash dividend of an equal amount
C. A share repurchase is equivalent to a cash dividend of an equal amount, so total shareholder wealth will be the same
Explanation
Assuming that the tax treatment of a share repurchase and a cash dividend of equal
amount is the same, a share repurchase is equivalent to a cash dividend payment, and
shareholder wealth will be the same.