Question

The balance sheet for Imagine Corp. is shown here in market value terms. There are 3,000 shares of stock outstanding.

Market Value Balance Sheet

Cash	$	25,000		Equity	$	167,000
Fixed assets		142,000
Total	$	167,000		Total	$	167,000

Topic: Repurchase of Stock

The company has declared a dividend of $1.32 per share. The stock will go ex-dividend tomorrow. Ignore taxes.

a) What is the stock selling for today? (Round answer to 2 decimal places. Do not round intermediate calculations)

  

b) What will the stock sell for tomorrow? (Round answer to 2 decimal places. Do not round intermediate calculations)

c) What will be the new value of cash after the dividend is paid? (Round answer to 0 decimal places. Do not round intermediate calculations)

d) What will be the new value of shareholders' equity after the dividend is paid? (Round answer to 0 decimal places. Do not round intermediate calculations)

Instead of a dividend, the company has announced it is going to repurchase $3,900 worth of stock.

e) What will be the new value of cash after the repurchase? (Round answer to 0 decimal places. Do not round intermediate calculations)

f) What will be the new value of shareholders' equity after the repurchase? (Round answer to 0 decimal places. Do not round intermediate calculations)

g) How many shares will be outstanding after the repurchase? (Round answer to 0 decimal places. Do not round intermediate calculations)

h) What will be the share price after the repurchase? (Round answer to 2 decimal places. Do not round intermediate calculations)

Answer 1

a) Stock Selling Today at Market Value of Equity/Shares Outstanding i.e. 167,000/3,000 = 55.67

b) Stock Vakue tomorrow = 55.67 - 1.32 = 54.35

c) Cash will decrease by the amount of dividend paid
New Value of Cash = 25,000 - 1.32 x 3,000 = 21,040

d) The stockholder equity will decrease by the same amount.
New Equity Value = 167,000 - 1.32 x 3,000 =  163,040

f) Cash will decrease by 3,900
New Value of Cash = 25,000 - 3,900 = 21,100

f) Equity will decrease by 3,900
New Equity Value = 167,000 - 3,900 =  163,100

g) Shares Repurchased = 3,900/(55.67) = 70.0
Shares Outstanding = 3,000 - 70 = 2,930

h) Share Price Post Repurchase = 163,100/2,930 = 55.67