Problem 148 Share Repurchase [LO 4]
The balance sheet for Throwing Copper, Inc., is shown here in
market value terms. There are 26,000 shares of stock
outstanding.
Market Value Balance Sheet  
Cash  $  156,000  
Fixed assets  514,800  Equity  $  670,800  
Total  $  670,800  Total  $  670,800  

The compay has announced it is going to repurchase $26,000 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 (Click to select)increasereduce 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
$
The equity and cash accounts will both decline by $26,000.
The stock price is the total market value of equity divided by the shares outstanding, so:
P0= 670,800/ 26,000
P0= $25.80 per share
Repurchasing the shares will reduce shareholders’ equity by $26,000.
The shares repurchased will be the total purchase amount divided by the stock price, so:
Shares bought = $26,000/ $25.80
Shares bought = 1,008
The new shares outstanding will be:
New shares outstanding = 26,000  1,008
New shares outstanding = 24,992
After repurchase, the new stock price is:
Share price = ($670,800  26,000) / 24,992 shares
Share price = $25.80
The repurchase is effectively the same as the cash dividend because you either hold a share worth $25.80, or a share worth $24.80 and $1.00 in cash. Therefore, if you participate in the repurchase according to the dividend payout percentage, you are unaffected
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