Stock Repurchase A firm has 15 million shares outstanding with a market price of

Question

Stock Repurchase

A firm has 15 million shares outstanding with a market price of $20 per share. The firm has $20 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 $1.2 million should be entered as 1.2, not 1,200,000. 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

Explanation / Answer

Step1:Computation of firm's value of operations after the repurchase.We have,

Market value of share of firm = Number of Shares x Market value per shares

Market value of share of firm before stock repurchase = 15 million x 20 = $ 300 million

Market value of share of firm after stock repurchase = 300 - 20 = $ 280 million

Step2: Computation of stock repurchase price after stock repurchase.We have,

p(15 - 20/p ) = 280

15 p - 20 = 280

p = 300/15 = $ 20

Hence, the stock price after repurchase is $ 20.00

Step3; Computation of shares will remain after the repurchase.We have,

Number of shares shall be repurchase = $ 20 million / 20 = 1 million shares

Hence, the number of shares shall be remain = 15 - 1 = 14 million shares.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.