Question

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 stock 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 price per share of Luther's stock after the share repurchase?A) $25B) $24C) $15D) $20

Answer 1

Answer:

Total market value of shares

= 1.25 billion x $20

= $25 billion

Market value of the share after share repurchase

= $25 billion - $5 billion

= $20 billion

Number of shares repurchased

= $5 billion/$20 per share

= 0.25 billion shares

Number of shares outstanding after the share repurchase

= 1.25 billion shares - 0.25 billion shares

= 1 billion shares

 

Market price per share after repurchase

= $20 billion/1 billion shares

= $20 per  share

The correct answer is D

Explanation:

The market value of the company's shares should be calculated which is a function of number of shares outstanding multiplied by market price per share. Then, we will calculate the market value after the share repurchase by deducting the value of share repurchase from the total market value. we also need to calculate the number of shares repurchased by dividing the cash available by market price per share. Number of shares outstanding after the share repurchase is the difference between the total number of shares and the number of shares repurchased. Finally, the market price per share after the share repurchase is calculated by dividing the market value of shares after repurchase by the number of shares outstanding after repurchase.