Question

The Barryman Drilling Company is planning an on-market buyback of $1 million worth of the company's 500000 shares, which are currently trading at a price of $10. Stan Barryman is the founder of the company and still holds 10000 company shares, which he originally purchased for $8 per share (more than 12 months ago).

a) if Stand decides to sell 2000 of his shares for $10 a share, What will be his after-ta proceeds if his personal marginal tax rate is 47%?

b) The Barryman Drilling Company is reconsidering its plan to buy back $1 million of its ordinary shares and instead plans to pay a $1 million fully franked cash dividend, which amounts to $2 per ordinary share. If the company tax rate is 30% and Stand Barryman's personal marginal tax rate is 47%, what tax liability does this create for him? what will be Stan's after-tax proceeds from the dividend distribution?

Answer 1

A)

Sale value of shares-2000@10	20000
purchase Value of share-2000@8	16000
profit	4000
tax @47%	1880
Net earnings	2120

B)

Equity	No	Amount
Buyback shares	500,000.00	1,000,000.00
Shares	10,000.00	100,000.00
Dividend		1,000,000.00
Corporate Tax		300,000.00
Net after corporate tax		700,000.00
personal margin tax		329,000.00
net proceeds from dividend distribution		371,000.00