A firm has 1,000 shareholders. Both you and Ms. Hostile are among them. Ms. Hostile owns 150 shares and is trying to fire the management, so management is offering to buy her out for a
$10 a share premium. The current market price per share is $30. What will be the value of
Each of your shares if Ms. Hostile takes this offer?

Question

Quizplus · Accepted Answer

If Ms. Hostile takes the offer, she will receive $40 per share (her original $30 per share plus the $10 premium) for a total of $6,000 (150 shares x $40 per share). The management will then repurchase 150 shares for net $4,500 (150 shares x $30 per share). The remaining shareholders will still own 850 shares. The total value of the company will be $25,500 ($4,500 + (850 shares x $30 per share)). Therefore, the value of each remaining share will be $30 ($25,500/850 shares) before the repurchase, and $28.24 ($25,500/900 shares) after the repurchase.

A Firm Has 1,000 Shareholders