Question

Maggie Fiduciary is a shareholder in the Superior Service Company (SSC). The current price of SSC’s stock is $33 per share, and there are 1 million shares outstanding. Maggie owns 10,000 shares, or 1% of the stock, which she purchased one year ago for $30 per share. Assume that SSC makes a surprise announcement that it plans to repurchase 100,000 shares of its own stock at a price of $35 per share. In response to this announcement, SSC’s stock price increases $1 per share, from $33 to $34, but this price is expected to fall back to $33.50 per share after the repurchase is completed. Assume that Maggie faces marginal personal tax rates of 15% on both dividend income and capital gains.
a. Calculate Maggie’s (realized) after-tax return from her investment in SSC shares, assuming that she chooses to participate in the repurchase program and all of the shares she tenders are purchased at $35 per share.
b. How many shares will Maggie be able to sell if all SSC’s shareholders tender their shares to the firm as part of this repurchase program and the company purchases shares on a pro rata basis?
c. What fraction of SSC’s total common equity will Maggie own after the repurchase program is completed if she chooses not to tender her shares?


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  • CreatedMarch 26, 2015
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