Question

Please list the calculation steps

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).

1. 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%?

2. 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?

Answer 1

(a)

A	Sell value	20000
	[2000 shares*$10 per share]
B	Purchase cost	16000
	[2000 shares*$8per share]
C=A-B	Profit on sale	4000
D	Tax on profit@47%	1880
A-D	After tax profit	$18120

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(b)

A	Number of shares	10000
B	Gross Dividend per share	$2
A*B=C	Total Gross dividend	20000
D	Tax already paid by the company @30%	6000
C-D=E	Net amount to be received by Stan Barryman	14000
F	Personal Tax liability@47% on the gross dividend	9400
	[$20000*47%]
	Tax already paid by company	6000
G=F-D	Additional tax liability created	3400
C-D-G	Net after-tax proceeds from the dividend distribution	10600