Question

A firm has 5 million shares outstanding with a market price of $30 per share. The firm has $30 million in extra cash (short-term investments) that it plans to use in a stock repurchase; the firm has no other financial investments or any debt. What is the firm's value of operations after the repurchase? Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Round your answer to two decimal places. $ million How many shares will remain after the repurchase? Round your answer to the nearest whole number. shares

Answer 1

Answer and Explanation:

The computation is shown below:

For the firm value of operations

Value of the firm's operations = {market price per share × number of outstanding shares ] - Additional cash needed

= [$30 × 5,000,000] - $30,000,000

= $150,000,000 - $30,000,000

= $120,000,000

Now shares after repurchase is

= Number of shares - (Additional cash needed ÷ per share value)

= 5,000,000 - ($30,000,000 ÷ $30)

= 5,000,000 - 1,000,000

= 4,000,000 shares