The balance sheet for Pie Crust, Inc., is shown here in market value terms. Ther

Question

The balance sheet for Pie Crust, Inc., is shown here in market value terms. There are 15,000 shares of stock outstanding Market Value Balance Sheet Cash Fixed assets 140,000 470,000 Equity $610,000 Total $610,000 Total $610,000 In lieu of a dividend of $1.20, the company has announced it is going to repurchase $18,000 worth of stock instead of paying a dividend Requirement 1 What effect will this transaction have on the equity of the firm? (Do not round intermediate calculations. Input the amount as positive value.) Will (Click to select)shareholders' equity by $ Requirement 2 How many shares will be outstanding after the repurchase? (Do not round intermediate calculations. Round your answer to the nearest whole number (e.g., 32).) New shares outstanding Requirement 3: What will the price per share be after the repurchase? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Share price Requirement 4 Is the share repurchase effectively the same as a cash dividend? (Click to select)

Explanation / Answer

Requirement 1 What effect will this transaction have on the equity of the firm? Answer: Reduce   Share holders Equity By $18000 The amount Equal to repurchase price of stock will be reduced from Share holders Equity Requirement 2 How Many Sahres Outstanding After repurchase? Number of Shares repurchased = Repurchased amount / Market Value per stock =$18000/40.67 =442.59 Shares Number of Shares repurchased =443 (Rounded off) Market Value per stock =$610,000/15000 =$40.67 Shares outstanding after repurchase = 15000-443 =14557 Shares Requirement 3 What will be the price per share after the repurchase Price per shares after repurchase = (Cash + Fixed assets) / Sahres after repurchase   = (140000-18000 +470000 ) /14557 =$40.67 Requirement 4 is the share Repurchase effectively the same as a cash Dividend ? Yes, Because the Amount of cash Dividend is used to repurchase the stock at market Value , So it same to the Sahre holder. (it deos not effect their share Value)

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