Choosing Between Real Investments and Share Repurchase
Appendix A of this chapter shows that retention (and investment) by the corporation is better than share repurchase, from the perspective of the investor, if the corporation earns a higher return (r, after corporate income tax) than the investor earns (rp, after investor tax). This calculation requires that an estimate be made of the after tax return available to the investor. The investor is taxed at the same rate with an immediate cash distribution or a distribution in the future.
Unable to display preview. Download preview PDF.