TJ's has a market value equal to its book value. Currently, the firm has excess cash of $218,500, other assets of $897,309, and equity of $547,200. The firm has 40,000 shares of stock outstanding and net income of $59,800. Management has decided to spend 15 percent of the excess cash on a share repurchase program. How many shares of stock will be outstanding after the stock repurchase is completed?
A) 47,937
B) 48,050
C) 37,604
D) 35,578
E) 41,584

Question

Quizplus · Accepted Answer

The firm will spend 15% of $218,500, which is $32,775, on repurchasing shares. The price per share is the market value of equity divided by the number of shares, which is $547,200 / 40,000 = $13.68 per share. The number of shares repurchased is $32,775 / $13.68 ≈ 2,396 shares. Therefore, the shares outstanding after repurchase will be 40,000 - 2,396 = 37,604 shares.

TJ's Has a Market Value Equal to Its Book Value