Company X has 100 shares outstanding.It earns $1,000 per year and announces that it will use all $1,000 to repurchase its shares in the open market instead of paying dividends.Calculate the number of shares outstanding at the end of year 1,after the first share repurchase,if the required rate of return is 10%.

Question

Quizplus · Accepted Answer

At 10% required rate of return, the value of the firm is:
$1,000 / 0.10 = $10,000

The price per share would be:
$10,000 / 100 shares = $100 per share

If the company uses all of its earnings to buy back shares, it can buy back:
$1,000 / $100 per share = 10 shares

So after the first repurchase, the number of shares outstanding will be:
100 shares - 10 shares = 90 shares

Therefore, the correct answer is C) 90.91 (rounded to two decimal places).

Company X Has 100 Shares Outstanding