Use the information for the question(s)below.
Rockwood Industries has 100 million shares outstanding,a current share price of $25,and no debt.Rockwood's management believes that the shares are underpriced,and that the true value is $30 per share.Rockwood plans to pay $250 million in cash to its shareholders by repurchasing shares.Management expects that very soon new information will come out that will cause investors to revise their opinion of the firm and agree with Rockwood's assessment of the firm's true value.
-If Rockwood is able to repurchase shares prior to the market becoming aware of the new information regarding Rockwood's true value,then the number of shares outstanding following the repurchase is closest to:
A)92 million.
B)10 million.
C)75 million.
D)90 million.

Question

Quizplus · Accepted Answer

We can use the formula for share repurchases:

Amount of cash used for repurchases / Repurchase price per share = Number of shares repurchased

Plugging in the given information:

$250,000,000 / $25 = 10,000,000

This means that Rockwood can repurchase 10 million shares with $250 million, which would leave 100 million - 10 million = 90 million shares outstanding.

Use the Information for the Question(s)below