Cripple Creek Distilleries Inc.is an all equity company with 20M shares outstanding.It's stock last closed at $20.Cripple Creek has too much cash.The CEO,Levon Helm,wants to distribute the excess cash with an open market stock repurchase.He is contemplating buying back $5M worth of shares at a price of $20.What will the stock price be after completion of the repurchase?

Question

Quizplus · Accepted Answer

If the repurchase does not change the capital structure, then it will not change the stock price. Therefore, the price after is equal to the price before, $20. The company spends $5 million and buys shares at $20, so the quantity purchased is: N_R = 11ea7fdb_fc51_dc8d_a768_6b9d57778bb4_TB2902_11 = 250,000 The fraction repurchased is: f = 11ea7fdb_fc52_039e_a768_c1811b3439c5_TB2902_11 = 11ea7fdb_fc52_039f_a768_77ac8482da70_TB2902_11 = 0.0125 What stock price prevails after the repurchase? P_A = P_B 11ea7fdb_fc52_03a0_a768_011a1a066308_TB2902_11 - P_R 11ea7fdb_fc52_03a1_a768_cd95f4f609f3_TB2902_11 P_A = $20 × 11ea7fdb_fc52_03a2_a768_9d4f2249e802_TB2902_11 - $20 × 11ea7fdb_fc52_03a3_a768_8d580c13959f_TB2902_11 P_A = $20