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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 stock repurchase plan. Currently Luther is an all equity firm with 1.25 billion shares outstanding. Luthers shares are currently trading at $20 per share. With perfect capital markets, what is the market value of Luthers equity after the share repurchase? O A. $15 billion OB. S5 billion O C. $20 billion O D. $10 billion OE. $25 billion

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Answer #1

Number of shares repurchased = Cash used for repurchase / Market value per share = $5 billion / $20 = 0.25 billion shares

Shares outstanding after repurchase = 1.25 billion shares - 0.25 billion shares = 1 billion shares

Market value of Luther's equity after the share repurchase = Shares outstanding after repurchase * Market value per share = 1 billion shares * $20 = $20 billion [ option C ]

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