A firm has a market value equal to its book value. Currently, the firm has excess cash of $2,600 and other assets of $5,000. Equity is worth $7,600. The firm has 950 shares of stock outstanding and net income of $1,150. The firm has decided to spend all of its excess cash on a share repurchase program. How many shares of stock will be outstanding after the stock repurchase is completed?
Question
A firm has a market value equal to its book value. Currently, the firm has excess cash of 5,000. Equity is worth 1,150. The firm has decided to spend all of its excess cash on a share repurchase program. How many shares of stock will be outstanding after the stock repurchase is completed?
Solution
To find out how many shares will be outstanding after the stock repurchase, we first need to determine the price per share before the repurchase.
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Calculate the price per share before the repurchase: The market value of the firm is equal to its equity, which is 7,600 / 950 = $8 per share.
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Determine how many shares the firm can repurchase with its excess cash: The firm has 8 per share, the firm can repurchase 8 = 325 shares.
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Subtract the number of shares repurchased from the original number of shares to find the number of shares outstanding after the repurchase: 950 shares - 325 shares = 625 shares.
So, there will be 625 shares of stock outstanding after the stock repurchase is completed.
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