Question

The market value balance sheet for Cherry Pie Corp. reflects a cash of $22,000, fixed assets of $209,000, and equity of $231,000. There are 5,000 shares of stock outstanding with a par value of $1 per share. The company has announced that it is going to repurchase $18,000 worth of stock. Other things equal, what will the price of the stock be after this repurchase?A) $36.60 B) $43.80 C) $50.10 D) $42.60 E) $39.20

Answer 1

The correct answer is D.

Step-by-step explanation:

Equity = $231,000

No. of outstanding shares = 5,000

Price of share =
`(231,000)/(5000)`

Price of share = $46.2

Repurchased shares worth $18,000

No. of shares repurchased =
`(18,000)/(46.2)`

No. of shares repurchased = 390

When the shares would have been repurchased then the value of equity would decrease by the same amount.

Revised equity = $231,000 - $18,000

Revised equity = $213,000

No. of shares outstanding = 5,000 - 390

No. of shares outstanding = 4,610

Thus, the price of each share would be:

Share price =
`(213,000)/(4,610)`

Share price = $42.60