Last week Lucky Strike Inc. was worth $100M and its shares traded for $10 (there are 10 million shares outstanding). Lucky is an all equity firm. Yesterday Lucky management announced that the company won $20 million in the lottery and the stock price rose to $12. Lucky is trying to decide whether to issue a $2 dividend or repurchase 1.667 million shares for $12 each. You own 100 shares of Lucky Strike. If your marginal tax rate on dividends is 25% and 15% on capital gains, what do you want the company to do? Assume that you bought your shares last week and will sell your shares after the dividend or repurchase. (Hint: Compare your after-tax wealth in each case.)
◦ Repurchase stock because after tax wealth is $1,170
◦ Issue the dividend because after tax wealth is $1,170
◦ Repurchase stock because after tax wealth is $1,190
◦ Issue the dividend because after tax wealth is $1,190
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