16 5. Toys R Us Inc. just lost a major lawsuit and its stock price dropped by 50

Question

16

5. Toys R Us Inc. just lost a major lawsuit and its stock price dropped by 50% to $10. There are 5 million shares outstanding with a book value per share of $20. The company has $10 million in cash readily available. The CFO feels the decline in price is temporary and the firm?s stock is an excellent investment at this time. If Toys R Us spends the entire $10 million on its own stock, and the market to book value ratio returns to its former level, how much more will each remaining share be worth than it was before the temporary price decline?

Explanation / Answer

Answer:

Worth of share before temporary decline = $10 /50% = $20 Per share

Book value per share =$20

Number of share before decline =5000000 Shares

Total Book value   =5000000 Shares * $20 = $100,000,000

Market to Book value share = $20 /$20 = 1

Share purchased by RU = $10,000,000/ $10 = 1,000,000 Shares

Number of shares after decline = 5000000 -1000000 =4000000 Shares

Book value per share after decline = $100,000,000 / 4000000 Shares = $25

Marker value per share = Book value * Market to Book value share =$25*1 = $25

Hence the value per share shall increase by $5 ($25 -$20)

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