Question

A firm has 5 million shares outstanding with a market price of $35 per share. The firm has $15 million in extra cash (short-term investments) that it plans to use in a stock repurchase; the firm has no other financial investments or any debt. What is the firm's value of operations after the repurchase? Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Round your answer to two decimal places.

$   million

How many shares will remain after the repurchase? Round your answer to the nearest whole number.

shares

Answer 1

Answer :

Shares repurchase means that the company is repurchasing its own shares from the market.

The no. of shares outstanding is 5,000,000. Current price per share is $35 and the extra cash is $15,000,000. The firm is planning to repurchase shares using the extra cash available.

The formula to calculate the value of the firm's operations is as follows :

Value of the firm's operations = [ market price per share * no. of shares outstanding ] - Extra cash

= [ $35 * 5,000,000 ] - 15,000,000

= $175,000,000 - $15,000,000

= $160,000,000

Therefore, the value of firm's operations is 160 million.

The shares will be purchased only at the market price. Calculate the no. of shares repurchased as follows:

Number of shares repurchased = Extra cash / Price per share

= $15,000,000 / $35 = 428,571 (Approx.)

Calculate the total no. of shares outstanding after repurchase as follows:

Number of shares outstanding after repurchase = [ number of shares outstanding - number of shares repurchased ]

= 5,000,000 - 428,571

= 4,571,429.

Therefore, the total no. of shares outstanding after repurchase is 4,571,429 shares.