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Rockwood Industries has 100 million shares outstanding, a current share price of $25, and no debt. Rockwood's management believes that the shares are under-priced, 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. Assume that Rockwood is not able to repurchase shares prior to the market becoming aware of the new information regarding Rockwood's true value. If Rockwood repurchases the shares following the release of the new information, then the number of shares outstanding following the repurchase is closest to:_______
A. $30.00
B. $31.50
C. 28.75
D. $30.60

Answer :

Answer:

D. $30.60

Explanation:

A step by step approach is provided below to determine the shares value after repurchase.

Number of Shares Repurchased = $250 million / $25 per share

Number of Shares Repurchased = 10 million shares

The total number of shares outstanding after repurchase are 90 Million (100 million - 10 million).

Value of the firm before repurchase = $30 x 100 million shares = $3,000 million

Value of the firm after repurchase = $3,000 million - $250 million = $2,750 million

Price per share after repurchase = $2,750 million / 90 million shares = $30.56 per share

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