B Ltd. has an issued capital of 5 Crore equity shares of ₹10 each. The company has free reserves of ₹300 Crore. The stock price quoted in stock market is ₹300. The promotor holds 70% of the equity capital in the company.

CS Professional · Capital Commodity and Money Market · PYQS · December 2021
B Ltd. has an issued capital of 5 Crore equity shares of ₹10 each. The company has free reserves of ₹300 Crore. The stock price quoted in stock market is ₹300. The promotor holds 70% of the equity capital in the company. B Ltd. has decided to distribute part of its surplus cash to its shareholders. The company short-listed two options: (i) Declare a dividend of 160 percent. (ii) Buy-back 2,00,000 equity shares @ ₹400 per share by way of Tender Route. Comment on the following aspects: (b) Will there be any difference in outgo of funds for the company ?

Answer & Explanation:

Yes there will be difference in total out-go of funds for the Company. There is no tax on dividend distribution. Hence total outgo shall be ₹80 crore i.e. 5 crore x 16 per share. In case of buy-back, the company has to pay a tax of 20% on the amount bought back by the company. As such the total outgo shall be ₹96 crore [₹ 80 crore + 16 crore (tax)]. In the buyback paid up capital of the company will get reduced after buy back.

Topics: Corporate Finance

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