Question #40
Reading: Reading 15 Analysis of Dividends and Share Repurchases
PDF File: Reading 15 Analysis of Dividends and Share Repurchases.pdf
Page: 15
Status: Unattempted
Question
Global Development expects to earn $6 million next year. 40% of this amount, or $2.4 million, has been allocated for distribution to common shareholders. There are 2.4 million shares outstanding, and the market price is $30 a share. If Global uses the $2.4 million to repurchase shares at the current price of $30 per share, its share price after the repurchase will be closest to:
Answer Choices:
A. $29.00
B. $30.00
C. $31.00
Explanation
Market value of equity before the repurchase is $30 × 2.4 million = $72 million.
Shares Repurchased = $2.4 million / $30 = 80,000 shares.
Shares remaining = Shares outstanding − Shares repurchased = 2,400,000 −
80,000 = 2,320,000.
Share price after the repurchase = ($72 million − $2.4 million) / 2,320,000 = $30.