Question

An equity financed company has 5,000,000of excess cash.It has 500 million shares outstanding.

If the company decided to use this excess cash to do a one time share buyback on the market.

WHAT IS THE PRICE OF SHARES AFTER BUYBACK

the current market price of each share is 20$.

Answer 1

Current Market capitalization = Share Price * Number of share

= 20 * 500 Millions

= 10,000 Millions

Now, The Number of shares repurchases

= 50,00,000 / 20

= 250,000 [ 0.25 Millions]

So, Number of shares = 500 Millions - 0,25 Millions

= 499.75 Millions

So, share price after repurchase = Market Capitalisation / Number of shares

= 10,000 Millions / 499.75 Millions

= 20.0100 [ Share Price]

Note : Please Note that the share buy bcak reduces the number of shares but the market capitalisation remains same leading to the increase in the share price.