Question

Hi, is this correct?

Firm 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?

Excess Cash

800,000

*Total dividend in the form of share repurchase

Assets (Book value = Market Value)

5,200,000

# of Shares outstanding

600,000

Equity (Market value of the firm)

6,000,000

Net Income

700,000

Share price

10

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

Answer to A

There will be 528,359 shares outstanding after the share repurchase

Answer 1

Solution

Yes it is correct

BVPS = Shareholder’s equity

               Number of outstanding shares

Shareholder’s equity = share capital + reserves and surplus

                                             = 6000000+ 700000

                                             = $6700000

BVSP = $6700000/600000

BVSP = 11.1666666667

NSP = Excess cash used to purchase shares

NSP= $800000/11.16666666667

NSP = 71641

Outstanding shares = Total number of shares – NSP

Outstanding shares = 600000-71641

Outstanding shares = 528359