Question

The balance sheet for Throwing Copper, Inc., is shown here in market value terms. There are 25,000 shares of stock outstanding. Market Value Balance Sheet Cash $ 168,000 Fixed assets 570,000 Equity $ 738,000 Total $ 738,000 Total $ 738,000 The compay has announced it is going to repurchase $25,000 worth of stock instead of paying a dividend of $1.00. What effect will this transaction have on the equity of the firm? (Input the answer as positive value. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Will shareholders’ equity by $ How many shares will be outstanding after the repurchase? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) New 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.) Share price $

Answer 1

Current market price = Total equity / no. of shares outstanding = $738,000 / 25000 = $29.52

The equity and cash accounts will reduce by $25000.

1) Stock to be repurchased = $25000

The company will repurchase this stock at the current market price.

No. of shares to be repurchased = $25000 / $29.52 = 846.8835 or 847 shares

New shares outstanding = 25,000 - 847 = 24,153

2) New share price will be the same as before, i.e., $29.52

New share price = value of equity / new total no. of shares = ($738000 - $25000) / 24153 = $29.52014 or $29.52