Intermediate Financial Management
14th Edition
ISBN: 9780357516782
Author: Brigham, Eugene F., Daves, Phillip R.
Publisher: Cengage Learning
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Chapter 15, Problem 4P
Summary Introduction
To determine: Value of operations and number of shares left with company after stock repurchase.
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Stock Repurchase
A firm has 20 million shares outstanding
with a market price of $20 per share.
The firm has $25 million in extra cash
(short-term investments) that it plans to
use in a stock repurchase; the firm has
no other financial investments or any
debt. What is the firm's value of
operations after the repurchase? Enter
your answer in millions. For example, an
answer of $1 million should be entered
as 1, not 1,000,000. Round your answer
to the nearest whole number.
million
How many shares will remain after the
repurchase? Round your answer to the
nearest whole number.
shares
A firm has 10 million shares outstanding with a market price of $20 per share. The firm has $25 million in extra cash (short-term investments) that it plans to use in a stock repurchase; the firm has no other financial investments or any debt.
Required:
What is the firm’s value of operations, and how many shares will remain after the repurchase?
A firm has 10 million shares outstanding with a market price of P20 per share. The firm has P25 million in extra cash (short-term investments) that it plans to use in a stock repurchase; the firm has no other financial investments or any debt. What is the firm’s value of operations, and how many shares will remain after the repurchase?
Chapter 15 Solutions
Intermediate Financial Management
Ch. 15 - Define each of the following terms: a. Optimal...Ch. 15 - How would each of the following changes tend to...Ch. 15 - What is the difference between a stock dividend...Ch. 15 - One position expressed in the financial literature...Ch. 15 - Indicate whether the following statements are true...Ch. 15 - Prob. 1PCh. 15 - Prob. 2PCh. 15 - Dividend Payout
The Wei Corporation expects next...Ch. 15 - Prob. 4PCh. 15 - Prob. 5P
Ch. 15 - Prob. 6PCh. 15 - Stock Split
Suppose you own 2,000 common shares of...Ch. 15 - Stock Split Fauver Enterprises declared a 3-for-1...Ch. 15 - Residual Distribution Policy Harris Company must...Ch. 15 - Prob. 11PCh. 15 - Prob. 12PCh. 15 - Integrated Waveguide Technologies (IWT) is a...Ch. 15 - Prob. 2MCCh. 15 - Assume that IWT has completed its IPO and has a...Ch. 15 - Prob. 4MCCh. 15 - Prob. 5MCCh. 15 - Suppose IWT has decided to distribute $50 million,...Ch. 15 - Prob. 7MCCh. 15 - Prob. 8MCCh. 15 - Prob. 9MC
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- 6. Stock repurchases Companies with excess cash often employ share repurchase plans in place of or along with cash dividends. Share repurchase plans can help investors liquidate their holdings by selling their stock to the issuing company and earning from capital gains. Consider the case of Gadgetron Inc.: Gadgetron Inc. expects to earn $5,300,000 this year. The company currently has 830,000 shares outstanding, and the shares have a per-share market price of $19. Assuming that Gadgetron's price-to-earnings (P/E) ratio remains constant and its earnings are unaffected by a share repurchase transaction, then the company's expected market price per share-if it repurchases 85,000 shares at the current market price-should be Which of these factors are considered an advantage of a stock repurchase? Check all that apply. The firm might pay too high a price for the repurchased stock. Repurchases can be used to produce large-scale changes in capital structure. When a firm distributes cash by…arrow_forwardShare repurchase proposal: Currently, the firm has available capital (cash and net income) of approximately $7,000,000. There is a large block of stock available at $35 a share. For the sake of this exercise let us disregard tax implications and effects. If the firm decides to spend this amount of excess cash on a share repurchase program, how many shares will be repurchased?? What are the benefits of repurchasing shares? How will this affect the capital structure of the company? How can this be interpreted in the marketplace? Suppose the market price of the shares is $35.75 a share. Why do you think the seller of the large block would agree to see at $35 a share? Suppose the assumptions of MM are true, then what would happen to the market price of shares once the purchase of the large block at $35 a share is completed? Would it rise above $35.75, remain unchanged or fall? Would a dividend be better? Please discuss the pros and cons of dividends and share buybacks. Make a…arrow_forwardA firm has 5 million shares outstanding with a market price of $35 per share. The firm has $10 million in extra cash (short-term investments) that it plans to use in a stock repurchase; the firm has no other financial investments or any debt. What is the firm's value of operations after the repurchase? Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Round your answer to two decimal places. $ million How many shares will remain after the repurchase? Round your answer to the nearest whole number. sharesarrow_forward
- Q.An unlevered company that has a current value of $1,600,000 is considering borrowing $700,000 and using the borrowed funds to repurchase shares. The company can borrow at 5% and has a cost of equity of 13%. EBIT is expected to remain the same every year forever. Assume all available earnings are immediately distributed to common shareholders and all the M&M assumptions are satisfied. What is the company's EBIT according to M&M Proposition I without taxes?arrow_forwardA firm has a market value equal to its book value. Currently, the firm has excess cash of $1,800 and other assets of $5,700. Equity is worth $7,500. The firm has 750 shares of stock outstanding and net income of $1,500. 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?arrow_forwardSuppose a firm does not pay a dividend but repurchases stock using $20 million of cash. The market value of the firm decreases by: E) -$40 million. A) $20 million. C) O. D) $40 million. B) -$20 million.arrow_forward
- Please help solve: Companies with excess cash often employ share repurchase plans in place of or along with cash dividends. Share repurchase plans can help investors liquidate their holdings by selling their stock to the issuing company and earning from capital gains. Consider the case of Sixty-second Avenue Company: Sixty-second Avenue Company has forecasted a net income of $4,800,000 for this year. Its common stock currently trades at $22 per share, and the company currently has 720,000 shares of common stock outstanding. It has sufficient funds available to pay a cash dividend, but many of its investors don't like the additional tax liability to which the dividend income subjects them. As a result, Sixty-second Avenue’s management is considering making a share repurchase transaction in which it would buy back 85,000 shares of its outstanding shares in the open market by paying the current market share price. Assume that the repurchase transaction will have no effect on either…arrow_forwardSuppose IWT has decided to distribute $50 million, which it presently is holding in liquid short-term investments. IWT’s value of operations is estimated to be about $1,937.5 million; it has $387.5 million in debt and zero preferred stock. As mentioned previously, IWT has 100 million shares of stock outstanding. Assume that IWT has not yet made the distribution. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? Now suppose that IWT has just made the $50 million distribution in the form of dividends. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? Suppose instead that IWT has just made the $50 million distribution in the form of a stock repurchase. Now what is IWT’s intrinsic value of equity? How many shares did IWT repurchase? How many shares remained outstanding after the repurchase? What is its intrinsic stock price per share after the repurchase?arrow_forwardStock Price after Recapitalization Lee Manufacturings value of operations is equal to 900 million after a recapitalization. (The firm had no debt before the recap.) Lee raised 300 million in new debt and used this to buy back stock. Lee had no short-term investments before or after the recap. After the recap, wd = 1/3. The firm had 30 million shares before the recap. What is P (the stock price after the recap)?arrow_forward
- Bayani Bakerys most recent FCF was 48 million; the FCF is expected to grow at a constant rate of 6%. The firms WACC is 12%, and it has 15 million shares of common stock outstanding. The firm has 30 million in short-term investments, which it plans to liquidate and distribute to common shareholders via a stock repurchase; the firm has no other nonoperating assets. It has 368 million in debt and 60 million in preferred stock. a. What is the value of operations? b. Immediately prior to the repurchase, what is the intrinsic value of equity? c. Immediately prior to the repurchase, what is the intrinsic stock price? d. How many shares will be repurchased? How many shares will remain after the repurchase? e. Immediately after the repurchase, what is the intrinsic value of equity? The intrinsic stock price?arrow_forwardCapital Structure Analysis Pettit Printing Company has a total market value of 100 million, consisting of 1 million shares selling for 50 per share and 50 million of 10% perpetual bonds now selling at par. The companys EBIT is 13.24 million, and its tax rate is 15%. Pettit can change its capital structure by either increasing its debt to 70% (based on market values) or decreasing it to 30%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 12% coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new 8% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change. The firm pays out all earnings as dividends; hence, its stock is a zero-growth stock. Its current cost of equity, rs, is 14%. If it increases leverage, rs will be 16%. If it decreases leverage, rs will be 13%. What is the firms WACC and total corporate value under each capital structure?arrow_forwardA firm has a market value equal to its book value. Currently, the firm has excess cash of $500 and other assets of $8,000. Equity is worth $8,500. The firm has 850 shares of stock outstanding and net income of $1,200. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase?arrow_forward
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