Because your client is unlikely to sell all 1 million shares today, at the time of dividend/repurchase, you decide to consider two longer holding periods: Assume that under both plans the client sells all remaining shares of stock 5 years later, or the client sells 10 years later. Assume that the stock will return 10% per year going forward. Also assume that Cisco will pay no other dividends over the next 10 years.
a. What would be the stock price after 5 years or 10 years if a dividend is paid now?
b. What would be the stock price after 5 years or 10 years if Cisco repurchases shares now?
c. Calculate the total after-tax cash flows at both points in time (when the dividend payment or the share repurchase takes place, and when the rest of the shares are sold) for your client if the remaining shares are sold in 5 years under both initiatives. Compute the difference between the cash flows under both initiatives at each point in time. Repeat assuming the shares are sold in 10 years.