Some investors think that the Rumple Shirt Co.'s repurchase program was a bad deal for shareholders,because the company paid too much for its repurchased shares.Before the repurchase,the company's shares traded for $30.Over the last quarter,Rumple repurchased 150 million shares (15% of shares outstanding)at an average price of $33 per share.Shares outstanding are now 850M.Calculate the stock price after the repurchase.If you bought 100 shares prior to the repurchase,and sold the same percentage of shares as Rumple repurchased (for the same price they paid),then what is your profit (loss)on the investment? (Assume that you sold the non-repurchased shares at the post-repurchase price.)

Question

Quizplus · Accepted Answer

The stock price after the repurchase is: P_A = P_B 11ea7fdb_fc52_ee12_a768_4598993b2970_TB2902_11 - P_R 11ea7fdb_fc52_ee13_a768_a3c7cce2a263_TB2902_11 P_B = $30 P_A = $30 × 11ea7fdb_fc53_1524_a768_6571776512e4_TB2902_11 - $33 × 11ea7fdb_fc53_1525_a768_bdd7e1634865_TB2902_11 P_A = $29.4706 Rumple repurchased f = 15% at an average price of $33, so you sold 15% at that price. The remaining shares are worth $29.4706 now. Cost of investment = 100 × $30 = $3,000 The cash received for shares sold in repurchase is: Repo proceeds = f × 100 × P_R Repo proceeds = 0.15 × 100 × $33 Repo proceeds = $495 Value of remaining shares: Value = (1 - f) × 100 × P_A Value = 0.85 × 100 × $29.4706 Value = $2,505 Profit (Loss) = Repo Proceeds + Value of Shares Remaining - Cost of Investment Profit (Loss) = $495 + $2,505 - $3,000 Profit (Loss) = $0

Some Investors Think That the Rumple Shirt Co