Question

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 stock 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.After the repurchase how many shares will Luther have outstanding?A) 0.75 billionB) 1.0 billionC) 1.1 billionD) 1.2 billion

Answer 1

Total market value of shares = 1.25 billion x $20 = $25 billion

Market value of shares after share repurchase = $25 billion - $5 billion

= $20 billion

No of shares after repurchase = Market value after repurchase

Market price per share

= $20 billion

$20

= 1 billion shares

The correct answer is B

Step-by-step explanation:

The total market value of shares is obtained by multiplying the number of shares outstanding by the market price per share. The market value after repurchase is total market value of shares less value of shares repurchased. The number of shares outstanding after repurchase is the market value after repurchase divided by the market price per share.