Question

Firm B Ltd is a company that specialises in online ordering and delivery of gift baskets. 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?

Answer 1

Given,

1. Excess cash = $800000

2. Value of firm’s other assets = $5200000

3. Outstanding shares = 600000

4. Worth of 600000 shares = $6000000

5. Net income =$700000

6. Book value per share= Market price per share(BVPS=MPS)

Step 1: computation of Book value per share (BVPS)

BVPS = Shareholder’s equity

               Number of outstanding shares

a. Shareholder’s equity = share capital + reserves and surplus

                                             = 6000000+ 700000

                                             = $6700000

BVSP = $6700000

               600000

BVSP = 11.1666666667

Step 2: Computation of number of shares to be purchased (NSP)

NSP = Excess cash used to purchase shares

                              MPS

NSP= $800000

        11.16666666667

NSP = 71641

Step 3: Computation of Outstanding shares after repurchase (OS)

OS = Total number of shares – NSP

OS = 600000-71641

OS = 528359

Therefore 528359 shares are outstanding after repurchase