Two part question In a taxless world with no brokerage coasts, repurchases and d

Question

Two part question

In a taxless world with no brokerage coasts, repurchases and dividends have the same effect on shareholder wealth. In the real world, however, repurchases provide more preferable tax treament than dividends to ordinary investors. Does this mean that firms should always use share repurhcases so that investors can gain from this tax benifit? Y/N?

Is it necessary for firms to repurchase stock only on the open market thorugh a tender offer, under which it permits stockholders to send in their shares at a predertimined proce? Y/N

Explanation / Answer

Companies tend to repurchase their shares when stock is estimated to be undervalued irrespective preferable tax treatment. If company sock is overvalued, it is not prefer to choose the repurchase option. Hence, tax treatment is not the thing to take decision about selection of share repurchase or dividends.

Therefore, for given statement, answer is No.

The given statement is true. Hence, answer is Yes.

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