Assume a firm has a market value equal to its book value,excess cash of $900,other assets of $16,500,and equity valued at $17,400.The firm has 1,200 shares of stock outstanding and net income of $15,400.If the firm spends all of its excess cash on share repurchases,how many shares will be outstanding after the repurchases are completed? (Round your answer up to the nearest whole share)

Question

Quizplus · Accepted Answer

The current book value of equity is $17,400. After deducting excess cash of $900, the adjusted book value of equity becomes $16,500. 
If the market value is equal to the book value, the market value of equity is $16,500. 
So, the price per share is $16,500/1,200 = $13.75 per share. 
If the firm spends all of its excess cash on share repurchases, they can repurchase $900/$13.75 = 65.45 shares. Rounded up to the nearest whole share, the number of shares repurchased would be 66 shares. 
Therefore, the number of shares outstanding after the repurchases would be 1,200 - 66 = 1,134 shares. 
So, the correct answer is C) 1,138 shares, which is the closest option to 1,134.

Assume a Firm Has a Market Value Equal to Its