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The firm’s CFO is currently considering a transaction to repurchase shares using excess cash of $800,000.

 

The firm’s CFO is currently considering a transaction to repurchase shares using excess cash of $800,000. The value of the firm’s other assets is $5,200,000. The firm has 600,000 shares outstanding and the total value of equity is worth $6,000,000. Assume the book value of assets equals the market value. The firm has a net income of $700,000. If the firm spends all of its excess cash on a share repurchase program, how many shares of stock will be outstanding after the stock repurchase is completed?
Step 1 Calculate the price per share          
  Shareholder’s equity = equity + net income          
  Shareholders equity = 6,000,000+ 700,000      
  Shareholders equity = $6,700,000        
  Price per share = Divide shareholder equity / # of current outstanding shares  
  Price per share = $6,700,000 / 600,000      
  Price per share = $11.16666667        
Step 2: Calculate the number of shares to be repurchased        
  Excess cash used to purchase shares $800,000        
  Price per share = $11.17        
  # of shares to repurchase = excess cash / price per share      
  # of shares to repurchase =         71,641.79        
  # of shares repurchased = 71,641 shares        
Step 3:   Calculate how many shares of stock will be outstanding after the stock repurchase is completed.
  OS= Outstanding shares      
  OS after the stock is repurchased = Current OS minus # of shares repurchased  
  OS = 600,000 – 71,641      
  OS = 528,359 after the share purchase  
B. Consider the situation of Firm Ltd in part (a) above. What will the stock price per share be if the firm pays out its excess cash as a cash dividend?
  If the firm pays out it's excess cash as a cash dividend the share price will decrease.  
  Decrease in share price = Cash paid/OS shares      
  Decrease in share price = $800,000/528,359      
  Decrease in share price = $             1.51        
  New share price after the dividend is paid = share price - decrease in share price post dividends paid
  New share price after dividend $             8.49        

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ekkarill92 answered 2 years ago
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