Question

Ret has 100 million shares outstanding, a current share price of $25, and no debt. Rets management believes that the shares are underpriced, and that the true value is $30 per share. Ret plans to pay $250 million in cash to its shareholders by repurchasing shares. Management expects that very soon new information will come out that will cause investors to revise their opinion of the firm and agree with Ret assessment of the firm's true value.


Assume that Ret is able to repurchase shares prior to the market becoming aware of the new information regarding Rets true value. After the repurchase, and following the release of the new information regarding the true value of Ret, the firm's share price is closest to _________.

• A. $30.60
• B. $31.50
• C. $28.75
• D. $30.00

Answer 1

Ret is able to repurchase shares prior to the market becoming
aware of the new information regarding Rets true value, so
Shares are repurchased at Current Share Price of $25.
No of Shares are repurchased
= Cash for Shares repurchase / Current Share Price
= $250 million / $25
= 10 million
No of Shares outstanding after repurchase of shares
= No of shares outstanding before Repurchase - No of Shares repurchased
= 100 million - 10 million
= 90 million
After the repurchase, and following the release of the new
information regarding the true value of Ret, so value of Ret
will be calculated using share price of $30.
Share Price
= Value of Ret / No of Shares outstanding after Repurchase
Where,
Value of Ret
= (No of Shares Outstanding before Repurchase*True Value of Share)-Cash Spent on Repurchase
= (100 million * $30) - $250 million
= $3000 million - 250 million
= $2750 million
Share Price
= Value of Ret / No of Shares outstanding after Repurchase
= $2750 million / 90 million
= $30.6