Initek Co.'s stock trades for $12.50.Initek has too much cash.The CEO,Bill Lumberg,wants to distribute the excess cash with an open market stock repurchase.He is contemplating buying back $5.45M worth of shares at a price of $12.50.Initek is an all equity company with 20M shares outstanding.Pete Gibb owns 2 million shares in Initek.He purchased his shares before the repurchase for $12.50.If Pete sells the same proportion of shares as the company repurchases (and receives the same price that they pay),then what is his change in wealth from before to after the repurchase?

Question

Quizplus · Accepted Answer

Wealth before = 2 million × $12.50 Wealth before = $25 million Wealth after = shares remaining + cash Wealth after = [1 million × (1 - f) × P_A] + (1 million × f × P_A) Initek spends $5.45 million and buys shares at $12.50, so N_R is: N_R = 11ea7fdb_fc52_78d7_a768_618339d2a257_TB2902_11 = 436,000 The fraction repurchased is: f = 11ea7fdb_fc52_78d8_a768_d3c32f73ec01_TB2902_11 = 11ea7fdb_fc52_78d9_a768_fdd892aa8dab_TB2902_11 = 0.0218 Wealth after = [1 M × (1-0.0218) × $12.50] + (1 M × 0.0218 × $12.50) Wealth after = $25 million ΔWealth = Wealth after - Wealth before ΔWealth = $25 million - $25 million ΔWealth = $0

Initek Co'S Stock Trades for $12