Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Let's say a company with a market cap around 100 millions USD manages to make this year around 6 millions USD in "profit". Let's say at the end of the year there are one million shares, each one valued at 106 USD.

Option A: company declares the 6 millions profit, pays about 2 millions in taxes (assuming rate = 33%) and pays 4 millions to shareholders in dividends. (In most countries, this 4 million will also be taxed as income to shareholders.)

Option B: company buys 6 millions USD / 100 (average price) ~= 60 000 of its own shares and cancels them. Assuming the company will be able to turn in the same 6 millions USD profit next year and assuming a constant earning per share, the new 940 000 shares should be valued at 106.38 USD.

If I understand correctly what you and ATinNM are telling me zero taxes are paid by company in option B.

The shareholder in option A will pay near or no capital gain if he sells his share (initially bought at the beginning of the year) after the dividend, and in option B he will pay capital gain tax.

From the state point of view, seems to be close, a more accurate model (real taxation rates, interest rates, company valuation model taking into account profit taxes) would be needed.

Any reference?

by Laurent GUERBY on Sat Dec 23rd, 2006 at 05:27:00 AM EST
[ Parent ]

Others have rated this comment as follows:


Occasional Series