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XYZ Inc has a value of operations of $50,000, short-term investments of $5,000, $25,000 in debt, and 500 shares outstanding
XYZ Inc has a value of operations of $50,000, short-term investments of $5,000, $25,000 in debt, and 500
shares outstanding. The company plans on distributing $2,500 through stock repurchases. Assuming the
repurchase does not signal new information, what will the stock price be immediately following the
repurchase?
Expert Solution
Value of equity before repurchase = Value of operations + short term investment - value of debt
=50000+5000-25000
=30000
Value per share = value of equity/number of shares
=30000/500
=60
Stock repurchase will be made at $60
Number of shares repurchased = amount of shares repurchased/share price of repurchase
=2500/60
=41.66666667
Shares outstanding after repurchase = 500-41.66666667
=458.3333333
Value of short term investment will reduced by $2500 as $2500 is distributed. As stock repurchase does not signal any new informaion, value of operations will remain the same
new short term investment = 5000-2500=2500
Value of equity = 50000+2500-25000
=27500
Value per share =27500/458.3333333
=60
So stock price immediately following the repurchase is $60
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