A ﬁrm has a market value equal to its book value. Currently, the ﬁrm has excess cash of $500 and other assets of $7,500. Equity is worth $8,000. The ﬁrm has 250 shares of stock outstanding and
Net income of $1,120. 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

Before the repurchase, the book value per share is:
(Book Value - Excess Cash)/Number of Shares = ($8,000 - $500)/250 = $30 per share
After the repurchase, the excess cash will be used to buy back shares, reducing the number of shares outstanding. The new number of shares outstanding will be:
Current Number of Shares - Excess Cash/Stock Price per Share = 250 - $500/$30 = 233.33 shares (rounded to 233)
The new book value per share will be:
(Book Value - Excess Cash)/(New Number of Shares) = ($8,000 - $500)/233 = $32.35 per share (rounded to $32)
Therefore, the stock price per share after the repurchase will be equal to the new book value per share, which is $32. Answer choice C is the correct option.

A ﬁRm Has a Market Value Equal to Its Book