Question

# The balance sheet for Sinking Ship Corp. is shown here in market value terms. There are...

 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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