Five years ago, Mr. Martinez purchased 1000 shares of JPM stock at $50 per share. The market price of the stock is now $55
If Mr. Martinez ' tax rate is 25%, would he prefer that the company pay a $5.00 per share dividend or offer to repurchase 100 shares at the market price? Assume that after the ex-dividend date, the price would return to $50 per share.
A) Pay the dividend because he would have no transaction costs.
B) As long as the tax rate on capital gains and dividends is the same, Martinez' wealth is the same under either alternative.
C) Repurchase the stock because he would owe less taxes.
D) He would be better off to sell the stock in the open market.
Answer: B
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