Question

Due to a recent tax cut, Company B decides to have a share buy back. Before the tax cut, Company B had a market capitalization of $ 400 million with 1 million outstanding shares. Company B purchases $80 million in shares. What is the company’s new market cap and stock price?

(a) $400 million, $400

(b) $320 million, $400

(c) $400 million, $500

(d) $320 million, $500

Answer 1

Market capitalization before tax cut = $400 million

Shares outstanding = 1 million

Price per share = Market capitalization before tax cut/Shares outstanding = $400 million/1 million = $400

Company B has purchased $80 million in shares.

This will reduce the market capitalization by $80 million.

So, the new market capitalization would be ($400 million - $80 million) $320 million.

Price would remain at $400 per share.

Hence, the correct answer is the option (b).