The balance sheet for Levy Corp. is shown here in market value terms. There are
ID: 2731621 • Letter: T
Question
The balance sheet for Levy Corp. is shown here in market value terms. There are 5,000 shares of stock outstanding.
Market Value Balance Sheet
Cash $ 43,900 Equity $ 373,900
Fixed assets 330,000
Total 373,900 Total 373,900
Instead of a dividend of $1.60 per share, the company has announced a share repurchase of $8,000 worth of stock.
How many shares will be outstanding after the repurchase? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))
Shares outstanding
What will the price per share be after the repurchase? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
New stock price $
Explanation / Answer
The stock price is the total market value of equity divided by the shares outstanding, so
P0 = $ 373,900/5000 shares
Po = $74.78 per share
Repurchasing of share will reduces shareholder's equity by $8000.The share repurchased will be the total purchase amount divided by stock price, so
Shares repurchased =$8000/$74.78
Shares repurchased = 106.98
And the new shares outstanding will be
5000 shares - 106.98 shares repurchased = 4893.02 shares
After purchase the new stock price is
=( $373,900 - $8000) / 4893.02 shares
= $365,900 / 4893.02 shares
New Stock Price = $74.78
The repurchase is effectively the same as the cash dividend because you either hold a share worth $74.78 or a share worth $73.18 and 1.6 in cash. Therefore if youparticipate in the repurchase according to the dividend payout percentage, you are unaffected.
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