Question

Problem 14-8 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            $

Answer 1

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