The balance sheet for Sinking Ship Corp. is shown here in market value terms. There are 5,000 shares of stock outstanding. |
Market Value Balance Sheet | ||||||
Cash | $ | 43,900 | Equity | $ | 373,900 | |
Fixed assets | 330,000 | |||||
Total | $ | 373,900 | Total | $ | 373,900 | |
Instead of a dividend of $1.60 per share, the company has announced a share repurchase of $8,000 worth of stock. |
a. |
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.)(Show work) |
b. | 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.)(Show work) |
Part a:
The stock price is calculated as total market value of equity divided by the number of shares outstanding.
Hence, stock price = $373,900 equity/5,000 shares= $74.78 per share
Repurchasing the shares will reduce cash and shareholders' equity by $8,000 (as given in the question that the company has announced a share repurchase of $8000 worth of stock)
The shares repurchased will be the total purchase amount divided
by the stock price, so:
Number of shares bought = $8,000/$74.78=106.98
After share repurchase, new shares outstanding will be:
New shares outstanding = 5,000-106.98=4893.02 or 4893 shares
Part b:
After repurchase, the new stock price is:
Share price =($373,900-$8,000)/4893.02 shares=$365900/4893.02
= $74.77999272 or $74.78 (rounded to two decimal places)
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