Problem - Microsoft was initially listed on NASDAQ on March 13, 1986 with an opening price of $25.50. Over the years, the stock has been split nine times. With huge cash reserves on hand (about $38 billion on June 30, 2002), the company paid its first dividend on February 19, 2003 ($0.08 cash dividend). After the initial dividend, a series of regular annual dividends followed.
In a surprise move, Microsoft declared a special dividend of $3 per share on July 20, 2004 with ex-dividend date on November 15, 2004. This special dividend is to be combined with a previously announced regular dividend of $0.08 (ex-dividend date of August 23, 2004) to be paid on December 2, 2004. With about 10.9 billion shares outstanding, the special dividend alone is worth more than $32 billion, the largest dividend distribution ever made by a U.S. company. Table 1 contains events of stock splits and dividends for Microsoft since its IPO.
Together with the announcement of special dividend, the company also announced a stock buyback plan of $30 billion in the next 4 years and an increase in annual dividend to $0.32. (This is on top of the $22 billion stock that Microsoft has bought back in the past four fiscal years.) The market responded warmly to the announcement, sending the stock up 5.7%, or $1.61, to $29.93 in after-hours trading. The trading volume jumped to 202 million shares on June 21, 2004, the day after the announcement of the special dividend, from a daily average of 69 million shares for the prior 90 trading days prior to the declaration.
Requirements
1. You have to use necessary research resources to answer the following questions related to Microsoft stock and its 2004 special dividend. Authoritative sources such as code sections, regulations, etc. if applicable must be cited to receive credit.
2. If a numerical answer is given, computation must be shown in your report to receive credit.
3. You have to turn in the answers for each question in a typed report with you name and student number listed on the top right hand corner of your report.
Questions
1. What are ex-dividend date, record date, and payment date?
2. How many shares of Microsoft stock would be held by an investor who owned one share of Microsoft stock since its IPO?
3. What is the annualized rate of return to a Microsoft shareholder who has owned the stock since its IPO till the ex-dividend day on November 15, 2004 (a holding period of about 18.7 years)? (Microsoft stock closed at $27.39 on November 15, 2004.)
4. What can be the reasons that Microsoft decided to starting paying dividend in 2003 and the special dividend in 2004?
5. How is Microsoft's 2004 special dividend taxed for individual shareholders? Please identify the tax rate and related requirements.
6. What is the amount of dividend that Bill Gates is expected to receive from his Microsoft holding and how much tax is Bill Gates expected to pay on the special dividend?
7. How is Microsoft's special dividend taxed for a corporation shareholder that owns Microsoft stock? Please identify the tax rate and related requirements.
8. If a corporation has owned 100 million shares of Microsoft stock for 5 years until the ex-dividend date of the 2004 special dividend, what is the effective tax rate on the special dividend?
9. The unusually large size of the Microsoft special dividend could trigger the 'extraordinary dividend' rule that could complicate the tax problem for shareholders. Provide answers for the following questions to an individual shareholder: what is extraordinary dividend, whether the 2004 Microsoft's special dividend is extraordinary dividend, what is the effect of extraordinary dividend on individual shareholders? (Make sure you cite the authoritative sources).
10. Discuss the tax situations for an individual shareholder who purchased 1,000 shares of Microsoft stock at $29.89 (opening price) on July 21, 2004 (the day after the announcement of the $3 special dividend) and sold the stock at $27.34 (opening price) on November 15, 2004 (the ex-dividend date).
11. What are the tax effects of extraordinary dividend on a corporation shareholder? (Make sure you cite the authoritative sources).
12. Discuss the tax effects for a corporate shareholder who purchased 1 million shares of Microsoft stock at $29.89 (opening price) on July 21, 2004 (the day after the announcement of the $3 special dividend) and sold the stock at $27.34 (opening price) on November 15, 2004 (the ex-dividend date).
Attachment:- Assignment.rar