Question

Widget Co. was founded at the start of 2016 by issuing 10M shares at $187.50 per share and $1,200M of long term debt. All data in the table, except actual price per share, is in millions. No assets were sold during the first two years of operation. Remember when and where to include marketable securities and the current portion of long term debt in your intermediate calculations. Use this information and the table below to answer problems 28-30. Net Income Dividends Cash Marketable Sec. Acct. Rec. Inventory Gross PPE cumulated Dep. Net PPE Acct. Payable CP LT Debt LT Debt 250 125 100 100 300 300 3000 200 2800 400 0 1200 100 2017 300 150 120 120 300 360 3600 500 3100 400 100 1400 98 Shares Out. P/sh 20.00 $ 22.00

30. During 2017, Widget Company __________.
HINT: BOY SE + NI – DIVS + Equity Issued – Equity Repurchased = EOY SE 23

1. Net borrowing was $200M and shares outstanding were repurchased at a price of $24 per share

2. Net borrowing was $200M and the company issued shares at a price of $25 per share

3. Net borrowing was $300M and shares outstanding were repurchased at a price of $24 per share

4. Net borrowing was $300M and shares outstanding were repurchased at a price of $25 per share

5. Net borrowing was $300M and the company issued shares at a price of $24 per share

Answer 1

There appear to be multiple typos in the question.

It is mentioned in the question that at the start of 2016, 10M shares are issued at $187.50 per share. Looking at the information about number of shares outstanding and price per share in the table, the correct information should be 100M shares issued at $18.75 per share.

Also, SE at the end of 2017 should be $2,200M instead of 23 as given.

Net borrowing at the end of 2016 = CP LT Debt + LT Debt = $0M + $1,200M = $1,200M

Net borrowing at the end of 2017 = CP LT Debt + LT Debt = $100M + $1,400M = $1,500M

Net borrowing during 2017 = Net borrowing at the end of 2017 - Net borrowing at the end of 2016

       = $1,500M - $1,200M = $300M

From the information given in the table, number of shares outstanding at the end of 2016 is 100M whereas number of shares outstanding at the end of 2017 is 98M. Therefore, it can be ascertained that no shares are issued or repurchased during 2016 and 2M shares are repurchased during 2017.

The SE at the end of 2017 is $2,200M. We need to calculate SE at the end of 2016 to calculate price at which shares are repurchased.

SE at the end of 2016 = Beginning SE + Net Income – Dividends + Equity Issued – Equity Repurchased

          = 100M x $18.75 + $250M – $125M + 0 – 0

          = $1,875M + $250M – $125M

          = $2,000M

SE at the end of 2017 = Beginning SE + Net Income – Dividends + Equity Issued – Equity Repurchased

   $2,200M = $2,000M + $300M - $150M + 0 – Equity Repurchased

$2,200M = $2,150M – Equity Repurchased

   Equity Repurchased = $2,200M – $2,150M = $50M

Repurchase price per share = $50M/2M share repurchased = $25 per share

Thus, the option 4^th option “Net borrowing was $300M and shares outstanding were repurchased at a price of $25 per share” is correct.