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Luther is a successful logistical services firm that currently has $5 billion in cash.Luther has decided to use this cash to repurchase shares from its investors,and has already announced the stock repurchase plan.Currently Luther is an all-equity firm with 1.25 billion shares outstanding.Luther's shares are currently trading at $20 per share.
-With perfect capital markets,what is the market price per share of Luther's stock after the share repurchase?
A)$25
B)$24
C)$15
D)$20

Question

Quizplus · Accepted Answer

In perfect capital markets, the share repurchase does not affect the stock price. Luther's market capitalization is $25 billion (1.25 billion shares * $20/share). After repurchasing $5 billion worth of shares, the market capitalization becomes $20 billion, but the number of shares decreases proportionally, keeping the price per share at $20.

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