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 $5,000. Equity is worth $6,000. The firm has 600 shares of stock outstanding and net income of $700. 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? Group of answer choices

Answer 1

Answer:

500

Explanation:

The computation of Total outstanding shares is shown below:-

Market Value of Shares before Share repurchase = Equity ÷ Number of Shares outstanding

= $6,000 ÷ 600

= $10

Shares repurchased = Excess Cash ÷ Price of a Share

= $1,000 ÷ 10

= 100

Total Outstanding Shares = Number of Shares outstanding  - Shares repurchased

= 600 - 100

= 500

We applied the above formula.