Question

The balance sheet for Tempest, Inc., is shown here in market value terms. There are 28,000 shares of stock outstanding. Market Value Balance Sheet Cash $176,000 Fixed assets 557,040 Equity $733,040 Total $733,040 Total $733,040 The compay has announced it is going to repurchase $44,800 worth of stock instead of paying a dividend of $1.60. a. What effect will this transaction have on the equity of the firm? (Input the answer as positive value. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. How many shares will be outstanding after the repurchase? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) c. What will the price per share be after the repurchase? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

a). In lieu of a dividend of $1.60, the company has announced it is going to repurchase $44,800 worth of stock instead of paying a dividend.

It will reduce shareholders' equity by $44,800

b). P0 = Equity / Shares Outstanding

= $733,040 / 28,000 = $26.18

Shares Repurchased = Amount of Repurchasing the stock / P0

= $44,800 / $26.18 = 1,711.23

New shares outstanding = Original Shares Outstanding - Shares Repurchased

= 28,000 - 1,711.23 = 26,288.77

c). New Stock Price = [Original Equity - Repurchased Equity] / New Shares Outstanding

= [$733,040 - $44,800] / 26,288.77

= $688,240 / 26,288.77 = $26.18