Mr. Burton owns 58,000 of the 100,000 outstanding shares of Mirkwood stock with a $50 basis per share. He wants to retire from business, and Mirkwood?s board of directors has offered to redeem any number of his shares for FMV ($120 per share). Mr. Burton wants to surrender enough shares so that the redemption will be treated as a sale instead of a dividend distribution.
(a) Determine the minimum number of whole shares that Mirkwood can redeem from Mr. Burton.
(b) Compute Mr. Burton's after-tax cash flow from the redemption and compare it to his after-tax cash flow if Mirkwood redeemed one share less than the minimum number. Assume that his marginal tax rate on ordinary income is 35 percent.