A firm has a market value equal to its book value. Currently,the firm has excess cash of $800 and other assets of $5,200. Equity is worth $6,000. The firm has 600 shares of stock outstanding and net income of $700. The firm has decided to spend all of its excess cash on a share repurchase program. How many shares of stock will be outstanding after the stock repurchase is completed?

Question

Quizplus · Accepted Answer

The total value of the firm is equal to the equity value plus the excess cash ($6,000 + $800 = $6,800). If the firm spends all of its excess cash on a share repurchase program, the total value of the firm will remain the same ($6,800), but the cash will decrease and the number of outstanding shares will decrease.

The firm can buy back a maximum of $800/$10 = 80 shares (since the current share price is not provided, assume it is $10 per share). Subtracting 80 shares from the current 600 shares gives 520 shares remaining after the repurchase program is completed. Therefore, the answer is C.

A Firm Has a Market Value Equal to Its Book