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    Share purchase/cash dividend/stock dividend

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    What are the major advantages of a share repurchase over a cash dividend?

    A. (Accounting for a stock dividend) Epson, Inc., has the common stock accounts shown here. The stock has a $38 per share market value. If Epson pays a 10% stock dividend, show the revised common stock accounts.

    Paid-in capital ($0.50 par value, 10,000,000 shares) $ 5,000,000
    Capital contributed in excess of par value 13,000,000
    Retained earnings 60,000,000
    Common stockholders' equity $78,000,000

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    Solution Preview

    The major advantages are:

    1. There is a favorable tax treatment. Share repurchases would result in capital gains which are taxed at a lower rate as compared to cash dividends which are taxed as ordinary income.

    2. The shareholders can decide whether to ...

    Solution Summary

    The solution explains the the major advantages of a share repurchase over a cash dividend and the impact on balance sheet of a stock dividend.