The following table shows the equity account (book value) of the DeWitt Com- pan

Question

The following table shows the equity account (book value) of the DeWitt Com- pany, as of December 31, 2014. Currently, DeWitt Company is under pressure from shareholders to repurchase shares. DeWitt’s cash balance is $5,000,000. The stock is trading for $20 a share and the equity section of its balance sheet appears as shown in Table 14. To pacify investors, the company decided to repurchase 50,000 shares of common stock.

a. In Table 12, reconstruct the shareholders’ equity section of the DeWitt balance sheet to
reflect the company repurchasing 50,000 shares of stock. A question mark marks the spaces to be
filled.

b. Indicate what the new price level is expected to be.

c. What is the level in the cash account after the stock repurchase?

Table 11
Before Repurchase
The DeWitt Company equity account, December 31, 2013
SHAREHOLDER EQUITY
Common Stock: ($5 par value; 1,000,000 shares) $5,000,000
Additional paid-in capital: $5,000,000
Retained earnings: $15,000,000
       Total shareholders’ equity: $25,000,000
Table 12
After Repurchase
The DeWitt Company equity account, December 31, 2013
SHAREHOLDER EQUITY
Common Stock (* par value; * shares): ?
Additional paid-in capital: ?
Retained earnings:
     Total shareholders’ equity: ?

Explanation / Answer

Number of Shares Repurchase = 50,000

Market Value per share = $ 20

Cash to be used for Repurchase of Shares = 50,000 * 20 = 1,000,000

After Repurhcase:

The DeWitt Company equity account, December 31, 2013:

SHAREHOLDER EQUITY:

Common Stock ( $ 5 par value; 1,050,000 shares ) : $ 5,250 0000

Additional Paid in capital = $ 5,750,000

Retained earnings: $ 14,000,000

Total Shareholders's: $ 25,000,0000

Cash Account:

Cash Balance before Shares Repurchase = $ 5,000,000

Cash used for Repurchase = $ 1,000,000

Cash Balance after Shares Repurchase = $ 4,000,000

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