Question 4

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 Stan decides to sell 2000 of his shares for $10 a share, what will be his after-tax 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 Stan 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?