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Luther is a successful logistical services firm that currently has $5 billion in cash. Luther has decided to use this cash to repurchase shares from its investors and has already announced the share repurchase plan. Currently, Luther is an all-equity firm with 1.25 billion shares outstanding. Luther's shares are currently trading at $20 per share.
-With perfect capital markets, what is the market value of Luther's equity after the share repurchase?
A)$25 billion
B)$20 billion
C)$10 billion
D)$15 billion

Question

Quizplus · Accepted Answer

The market value of Luther's equity after the share repurchase remains unchanged at $20 billion. Initially, with 1.25 billion shares outstanding at $20 per share, the total market value is $25 billion. However, the firm uses $5 billion of its cash to repurchase shares, reducing its cash and equity by the same amount. Thus, the market value of equity after the repurchase is $20 billion ($25 billion - $5 billion).

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