Question

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)

Answer 1

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)