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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.
-Assume that in addition to 1.25 billion ordinary shares outstanding, Luther has share options given to employees valued at $2 billion. After the repurchase how many shares will Luther have outstanding?
A)1.2 billion
B)1.0 billion
C)0.75 billion
D)1.1 billion

Question

Quizplus · Accepted Answer

The current market capitalization of Luther is 1.25 billion shares x $20 per share = $25 billion. 
If Luther repurchases $5 billion worth of shares at the current market price, then they will repurchase $5 billion / $20 per share = 250 million shares. 
So after the repurchase, Luther will have (1.25 billion shares - 250 million shares) = 1.0 billion shares outstanding.
The share options given to employees are not relevant to this calculation as they do not impact the number of outstanding shares until they are exercised.

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