Ex1 Example: XYZ firm has $150,000 cash and it has 100,000 shares outstanding, w

Question

Ex1

Example:

XYZ firm has $150,000 cash and it has

100,000 shares outstanding, worth $1 million

in total. If it buys back 10,000 shares at $10

per share, how is shareholder wealth

affected?

Before repurchase: stock price & shares

outstanding

After repurchase: stock price & shares

Ex2:

(3) Stock repurchase and stock valuation

• Example1. Stock valuation when we pay

cash dividends

XYZ firm promises to pay annual dividends of

$100,000 in perpetuity with 100,000 shares

outstanding. Assume the discount rate is

11.11%. What is its stock price?

Need answers and explanation

Explanation / Answer

Before Repurchase Stock price Total Value/ No of shares 1000000/100000 $ 10 per share Shares Outstanding will eb 100000 shares After Repurchase Shares Outstanding 100000-10000 = 90000 Shares Stock price = $ 10 per share 2 Stock Price = Dividend/ Discount Rate 100000/.1111 900090.01 Stock Price is $ 900090

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