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You are a very powerful institutional investor that holds 1 million shares of Cisco System, Inc., purchased on February 28, 2003. In researching Cisco, you discovered that they are holding a large amount of cash. Additionally, you are upset that the Cisco stock price has been somewhat stagnant as of late. You are considering approaching Cisco's Board of Directors with a plan to payout half of the cash the firm has accumulated, but can't decide whether a share repurchase or a special dividend would be best. Because both dividends and capital gains are taxed at the same rate (15%), at the first glance there seems to be no difference between the two options. To confirm, however, you need to run the numbers for each scenario. Assume that the current stock price is $45 and the number of shares outstanding for Cisco's stock is 5,100,000,000 shares. To help you answer the questions below, you can use information obtained from http://finance.yahoo.com. You can find Cisco's cash balance under Cash and Cash Equivalents reported on the balance sheet (Note that the number is in thousands). To obtain the initial purchase price at which you bought the stock on February 28, 2003, click Historical Data, enter February 28, 2003 (the date you purchased the stock) as the start date and end date, choose Daily frequency, and hit Get Prices. Record the Adj Close price. This is your initial purchase price. The calculation in Question 3 reflects your immediate proceeds arising from the payout event itself, but it does not consider the final payoff for you after any remaining shares are liquidated. To incorporate this feature, you first decide to see what happens if you sell all remaining shares of stock immediately after the payout (either dividend or the repurchase). Note that these liquidation proceeds (both after dividend payments and share repurchase) are subject to capital gain taxes (15% tax rate). 5. What is the after-tax liquidation proceeds from immediately selling any remaining shares under the dividend scenario? Assume that the stock price will fall by the amount of the dividend per share immediately after the dividend payment. (0.5 points) 6. What is the after-tax liquidation proceeds from immediately selling any remaining shares under the repurchase scenario? (0.5 points) 7. Under which payout policy do you pay more taxes? And how much more? (0.2 points) 8. Combining the difference in the after-tax payout proceeds (i.e., what you obtained in part I) and the difference in the after-tax liquidation proceeds (i.e., what you obtained in Part II), 2 compute the difference in the total after-tax proceeds between the two scenarios. Under which scenario would you be better off after taxes? In other words, which option gives you a higher total after-tax payoff from part I &II? (0.3 points) You are a very powerful institutional investor that holds 1 million shares of Cisco System, Inc., purchased on February 28, 2003. In researching Cisco, you discovered that they are holding a large amount of cash. Additionally, you are upset that the Cisco stock price has been somewhat stagnant as of late. You are considering approaching Cisco's Board of Directors with a plan to payout half of the cash the firm has accumulated, but can't decide whether a share repurchase or a special dividend would be best. Because both dividends and capital gains are taxed at the same rate (15%), at the first glance there seems to be no difference between the two options. To confirm, however, you need to run the numbers for each scenario. Assume that the current stock price is $45 and the number of shares outstanding for Cisco's stock is 5,100,000,000 shares. To help you answer the questions below, you can use information obtained from http://finance.yahoo.com. You can find Cisco's cash balance under Cash and Cash Equivalents reported on the balance sheet (Note that the number is in thousands). To obtain the initial purchase price at which you bought the stock on February 28, 2003, click Historical Data, enter February 28, 2003 (the date you purchased the stock) as the start date and end date, choose Daily frequency, and hit Get Prices. Record the Adj Close price. This is your initial purchase price. The calculation in Question 3 reflects your immediate proceeds arising from the payout event itself, but it does not consider the final payoff for you after any remaining shares are liquidated. To incorporate this feature, you first decide to see what happens if you sell all remaining shares of stock immediately after the payout (either dividend or the repurchase). Note that these liquidation proceeds (both after dividend payments and share repurchase) are subject to capital gain taxes (15% tax rate). 5. What is the after-tax liquidation proceeds from immediately selling any remaining shares under the dividend scenario? Assume that the stock price will fall by the amount of the dividend per share immediately after the dividend payment. (0.5 points) 6. What is the after-tax liquidation proceeds from immediately selling any remaining shares under the repurchase scenario? (0.5 points) 7. Under which payout policy do you pay more taxes? And how much more? (0.2 points) 8. Combining the difference in the after-tax payout proceeds (i.e., what you obtained in part I) and the difference in the after-tax liquidation proceeds (i.e., what you obtained in Part II), 2 compute the difference in the total after-tax proceeds between the two scenarios. Under which scenario would you be better off after taxes? In other words, which option gives you a higher total after-tax payoff from part I &II? (0.3 points)

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