The balance sheet for Throwing Copper, Inc., is shown here in market value terms
ID: 2616558 • Letter: T
Question
The balance sheet for Throwing Copper, Inc., is shown here in market value terms. There are 29,000 shares of stock outstanding.
The compay has announced it is going to repurchase $20,300 worth of stock instead of paying a dividend of $.70.
What effect will this transaction have on the equity of the firm? (Input the answer as positive value. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Will increase shareholders’ equity by $
How many shares will be outstanding after the repurchase? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
New shares outstanding
What will the price per share be after the repurchase? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Share price $
Explanation / Answer
Throwing Copper, Inc. The equity and cash accounts will both decline by $20,300. The stock price is the total market value of equity divided by the shares outstanding, so: P 0 = $659,750 equity / 29,000 shares P 0 = $22.75 per share Repurchasing the shares will reduce shareholders’ equity by $20,300. The shares repurchased will be the total purchase amount divided by the stock price, so: Shares bought = $20,300 / $22.75 Shares bought = 892 And the new shares outstanding will be: New shares outstanding = 29,000 – 892 New shares outstanding = 28,108 After repurchase, the new stock price is: Share price = ($659,750 – 20,300) / 28,108 shares Share price = $22.75 The repurchase is effectively the same as the cash dividend because you either hold a share worth $22.75, or a share worth $22.05 and $0.70 in cash. Therefore, if you participate in the repurchase according to the dividend payout percentage, you are unaffected.
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