Question

The balance sheet for Rami Corp. is shown here in market value terms. There are 10,000 shares of stock outstanding.
  

Market Value Balance Sheet
Cash	$	45,700			Equity	$	555,700
Fixed assets		510,000
Total	$	555,700			Total	$	555,700

  
Instead of a dividend of $1.80 per share, the company has announced a share repurchase of $18,000 worth of stock.
  
How many shares will be outstanding after the repurchase? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
Shares outstanding             
  
What will the price per share be after the repurchase? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
New stock price           $

Answer 1

The stock price is the total market value of equity divided by the shares outstanding, so:

P₀ = $555,700 equity / 10,000 shares

P₀ = $55.57 per share

Repurchasing the shares will reduce shareholders’ equity by $18,000. The shares repurchased will be the total purchase amount divided by the stock price, so:

Shares repurchased = $18,000 / $55.57

Shares repurchased = 323.92

And the new shares outstanding will be:

New shares outstanding = 10,000 – 323.92

New shares outstanding = 9,676.08

After repurchase, the new stock price is:

New stock price = ($555,700 – 18,000) / 9,676.08 shares

New stock price = $55.57