Ewing Oil has $5B of excess cash and has announced an open market stoc

Ewing Oil has $5B of excess cash and has announced an open market stock repurchase. Prior to the announcement, the stock was trading for $25 per share and there are 2.5B shares outstanding.

Assume that the stock repurchase is executed at the pre-repurchase price. Sue Ellen has 100 shares of Ewing Oil. She bought the shares for $25 per share. Sue Ellen pays a tax rate of 20% on capital gains and 34% on dividends. What is Sue Ellen’s after-tax wealth if she sells the same proportion of shares as Ewing repurchases, and that she receives the same price that Ewing pays? Assume that Sue Ellen sells her remaining shares after the repurchase at the price that prevails after the repurchase.
A) $1,800
B) $1,965
C) $2,250
D) $2,500
E) $2,625

ANSWER

D