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Luther is a successful logistical services firm that currently has $5 billion in cash. Luther has decided to use this cash to repurchase shares from its investors and has already announced the share repurchase plan. Currently, Luther is an all-equity firm with 1.25 billion shares outstanding. Luther's shares are currently trading at $20 per share.
-With perfect capital markets, what is the market price per share of Luther's stock after the share repurchase?
A)$24
B)$15
C)$25
D)$20

Question

Quizplus · Accepted Answer

In perfect capital markets, the share repurchase does not change the market price per share. Luther's market capitalization decreases by the amount of cash used for the repurchase, but the number of shares decreases proportionally, keeping the price per share the same at $20.

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