Question

A firm has a market value equal to its book value. Currently, the firm has excess cash of $1,000 and other assets of $3,000. Equity is worth $4,000. The firm has 500 shares of stock outstanding and net income of $1,250. The firm has decided to spend all of its excess cash on a share repurchase program. How many shares of stock will be outstanding after the stock repurchase is completed?

Answer 1

Answer:

Par value of equity = $4,000/500 shares

                               = $8 per share

No of shares repurchased = $1,000/$8

                                          = 125 shares

Number of shares outstanding = 500 shares - 125 shares

                                                   = 375 shares

Explanation:

In this case, we need to determine the par value of shares by dividing the total worth of shares by the number of shares. Then, we will calculate number of shares repurchased by dividing the excess cash by the par value per share. Finally, we will calculate the number of shares outstanding by deducting the number of shares repurchased from the number of shares available.