A firm has a market value equal to its book value. Currently, the firm has excess cash of $1,400 and other assets of $3,500. Equity is worth $4,900. The firm has 700 shares of stock outstanding and net income of $1,450. The firm has decided to spend all of its excess cash on a share repurchase program. How many shares of stock will be outstanding after the stock repurchase is completed?
500 shares
707 shares
307 shares
514 shares
507 shares
Answer : 500 Shares
Working Notes
currently company having excess cash of $1,400
Equity is worth $4,900.
The firm has 700 shares of stock outstanding
and market value equal to its book value
so the value of one share is = $ 4900/700 share
= $ 7 per share
So from $ 1400 cash we can purchase following share
= $ 1400/7 $ per share
= 200 share
shares of stock will be outstanding after the stock repurchase is completed will be as follow
= 700 share- 200 share repurchased
=500 share
