Question

Cerner Corporation announced a first-come, first-serve stock repurchase offer to its shareholders – the company agreed to repurchase 2,653,780 shares of its common stock in exchange for total consideration of $173,434,000. Cerner had 329,641,500 total shares outstanding before the redemption. You acquired 16,482,075 shares of Cerner's stock two years ago for $20/share. You were the only shareholder to participate in the repurchase offer and Cerner agreed to redeem the total number of shares directly from you. Using the applicable tax rates provided below, compute your after-tax savings if the redemption is treated as an exchange as opposed to a dividend distribution. Any dividend income amounts should be considered ordinary income in character. For purposes of the after-tax savings calculation, you should assume you are liable for the net investment income tax on both capital gains and dividend income. Applicable tax rates: Individual - ordinary income - 34% Individual - long-term capital gains - 20% Individual - net investment income - 3.8%

Answer 1

Solution:

In the given question, Cerner Corporation announced a first-come, first-serve stock repurchase offer to its shareholders – the company agreed to repurchase 2,653,780 shares of its common stock in exchange for total consideration of $173,434,000. Cerner had 329,641,500 total shares outstanding before the redemption.

You acquired 16,482,075 shares of Cerner's stock two years ago for $20/share. You were the only shareholder to participate in the repurchase offer and Cerner agreed to redeem the total number of shares directly from you.Now we have to compute your after-tax savings if the redemption is treated as an exchange as opposed to a dividend distribution.

1. Lets find out the repurchase amount per share =Total consideration/No. of shares to be repurchased

= $173434000/2653780

= $ 65.35 per share

2. Cash Flow from Repurchase of shares = No. of shares acquired * Repurchase price per share

= $16482075 * 65.35

= $1077103601

3. Capital Gain on Repurchase of shares = (Repurchase price per share - share price) * No. of shares acquired

= (65.35-20) * 16482075

= $149492420

4. Net Cash Flow (values taken from above) = Cash flow from repurchase of shares - Capital Gain on Repurchase of shares

= 1077103601-149492420

= $ 927611181.