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

After repurchasing shares with the $990 excess cash, the equity value will be $11,000 - $990 = $10,010. With 500 shares initially, the firm will repurchase $990/$22 = 45 shares. Remaining shares = 500 - 45 = 455. New stock price = $10,010 / 455 = $22.

A ﬁRm Has a Market Value Equal to Its Book