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Can you please solve this homework assignment?

2. If Cisco paid out the cash in the form of special dividends, what is the dollar amount of taxes
you (the institutional investor) will pay on the dividend income? Note that you need to compute
You are a very powerful institutional investor that holds 1 million shares of Cisco System, Inc.,
the total dividend income taxes (dollar amount), not just dividend income tax per share.
purchased on February 28, 2003. In researching Cisco, you discovered that they are holding a large
3. If the cash is (indirectly) paid through stock repurchase instead, payout proceeds are a little bit
amount of cash. Additionally, you are upset that the Cisco stock price has been somewhat stagnant
indirectly realized. Let's assume that you will make a "home-made dividend" by selling some
as of late. You are considering approaching Cisco's Board of Directors with a plan to payout half
number of shares from your initial holdings. The number of shares that you can sell and still
of the cash the firm has accumulated, but can't decide whether a share repurchase or a special
maintain the same proportion of ownership before and after repurchase program is 26,376
shares. Assuming that you can sell these shares at the current market price, what is the after-
dividend would be best. Because both dividends and capital gains are taxed at the same rate (15%),
tax payout proceeds from this home-made dividend under the repurchase scenario? Note that
at the first glance there seems to be no difference between the two options. To confirm, however,
home-made dividends, unlike actual dividends, are realized by selling stock and therefore are
you need to "run the numbers" for each scenario. Assume that the current stock price is $45 and
subject to capital gain taxes:
the number of shares outstanding for Cisco's stock is 5,100,000,000 shares.
Capital gain taxes = (Selling price - Initial purchase price) x
Number of shares sold x Capital gain tax rate
4. Do you pay more for receiving special dividends or share repurchases? How much more?
To help you answer the questions below, you can use information obtained from
You can find Cisco's cash balance under "Cash and Cash Equivalents" reported on the
Questions part II:
balance sheet (Note that the number is in thousands).
The calculation in Question 3 reflects your immediate proceeds arising from the payout event itself,
. To obtain the initial purchase price at which you bought the stock on February 28, 2003,
but it does not consider the final payoff for you after any remaining shares are liquidated. To
click "Historical Data," enter February 28, 2003 (the date you purchased the stock) as the
incorporate this feature, you first decide to see what happens if you sell all remaining shares of
start date and end date, choose "Daily" frequency, and hit "Get Prices." Record the "Adj
stock immediately after the payout (either dividend or the repurchase).
Close" price. This is your initial purchase price.
Note that these liquidation proceeds (either after dividend payments or share repurchase) are
subject to capital gain taxes (15% tax rate).
5. What is the after-tax liquidation proceeds from immediately selling any remaining shares under
Questions part I:
the dividend scenario? Assume that the stock price will fall by the amount of the dividend per
share immediately after the dividend payment.
1. What is the number of shares that would be repurchased (at the current market price of $45) in
6. What is the after-tax liquidation proceeds from immediately selling any remaining shares under
the repurchase scenario? What is the dividend per share that could be paid in the dividend
the repurchase scenario?
7. Under which payout policy do you pay more taxes? And how much more?
8. Combining the difference in the after-tax payout proceeds (i.e., what you obtained in part D)
and the difference in the after-tax liquidation proceeds (i.e., what you obtained in Part II),
compute the difference in the total after-tax proceeds between the two scenarios. Under which
scenario would you be better off after taxes? In other words, which option gives you a higher
total after-tax payoff from part I & II?
ADJ CLOSE PRICE 02/28/2003
Questions part III:
Rather than selling all remaining shares today, now you decide to consider a longer holding period.
That is, you will sell all remaining shares in 5 years rather than immediately. Assume that the stock
price will grow at 10% rate per year going forward, regardless of what the starting price is today.
Also assume that Cisco will pay no other dividend over the next 5 years.
9. What would be the stock price after 5 years under each scenario (i.e. the dividend and share
repurchase scenario)?
10. What is the after-tax liquidation proceeds from selling remaining shares 5 years after the
dividend payment?
1 1. What is the after-tax liquidation proceeds from selling remaining shares 5 years after the stock
12. What is the difference in the after-tax liquidation proceeds between the two scenarios? Note
that this difference is occurring at time 5 instead of time 0, so you need to calculate the present
value of the difference using discount rate of 10%.
13. Do you think your preference changes depending on your investment horizon? If so, how?
Subject: Business, Finance

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