Question

The Martin company plans on using their ST investments to repurchase shares of stock. What will the intrinsic per share stock price be immediately after the repurchase? How many shares will remain outstanding?

Value of Operations $500,000,000

Short term investments $40,000,000

Debt $140,000,000

Number of shares 4,000

Answer 1

Given:

Value of Operations = $500,000,000

Short term investments = $40,000,000

Debt = $140,000,000

Number of shares = 4,000

Sol:

The current intrinsic value per share can be calculated as,

Value = (Value of Operations + Short term investments -Debt)/4000 = (500 + 40 -140)/4000 Millions

= 400/4000 Millions or 100,000 per share

Assuming that the shares are repurchsed as at price = X, than

no. of shares repurchesed = 40,000,000/X,

and Remaining shares = 4000-40,000,000/X

The new intrinsic value would be,  Value of Operations -Debt)/remaining share, Thus we realize the new intrinsic value is dependent on the price at which the shares are repurched

Taking the case where the repurchase price paid = X = intrinsic Value of share = 100,000

No of shares repurchased, = 40,000,000/100,000 = 400 shares

Remaining share = 4000-400 = 3600

and the new intrinsic value =) (500-140)/3600 Millions = 100,000 per share,

Hence, when the shares are repurchased at their intrinsic value, the intrinsic value post repurchase remains same.

Similarly, it can be shown that if the price paid for repurchase is greater that the intrinsic value, the new intrinsic value decreases post repurchase, and

if the price paid for re-purchse is less than intrinsic value, the new intrinsic value post repurshe is higher than beginning intrinsic value.