A firm has a market value equal to its book value. Currently, the firm has excess cash of $990 and other assets of $10,010. Equity is worth $11,000. The firm has 500 shares of stock outstanding and net income of $2,250. The firm is going to use all of its excess cash to repurchase shares of stock. What will the stock price per share be after the stock repurchase is completed?

Question

Quizplus · Accepted Answer

The firm has a market value equal to its book value, so the market value of equity is $11,000. The firm has 500 shares of stock outstanding, so the current stock price is $11,000 / 500 = $22. After the stock repurchase, the firm will have 500 - 990 / 22 = 450 shares of stock outstanding. The market value of equity will still be $11,000, so the new stock price will be $11,000 / 450 = $24.

A Firm Has a Market Value Equal to Its Book