Answer and Explanation:
The computation is shown below.
1. Value of the firm operations is
= Free Cash Flow × (1 + Growth Rate) ÷ (WACC - Growth Rate)
= $87 million × (1 + 8%) ÷ (13% - 8%)
= $1,879.20
This is the answer but the same is not provided in the given options
2. The intrinsic value of equity immediately prior to stock repurchase is
= Value of Firm's Operations + Value of Non Operating Assets - Value of Debt - Value of Preferred Stock
= $1,879.20 + $120 - $232 - $145
= $1,622.20
This is the answer but the same is not provided in the given options
3. The intrinsic stock price immediately prior to stock repurchase is
= Intrinsic Value of Equity Prior to Stock Repurchase ÷ Number of Outstanding Shares
= ($1,622.20) ÷ (21.75 million shares)
= $74.58
This is the answer but the same is not provided in the given options
4. The number of shares repurchased is
= Cash Used for Repurchase ÷ Intrinsic stock price
= $120 ÷ $74.58
= 1.61
This is the answer but the same is not provided in the given options
5. The intrinsic value of equity immediately after stock repurchase is
= Value of Firm's Operations - Value of Debt - Value of Preferred Stock
= $1,879.20 - $232 - $145
= $1,502.20
This is the answer but the same is not provided in the given options
6. The intrinsic stock price immediately after stock repurchase is
= Intrinsic Value of Equity After Stock Repurchase ÷ Number of Outstanding Shares after Repurchase
= ($1,502.20) ÷ (21.75 million shares - 1.61 million shares)
= $74.59
This is the answer but the same is not provided in the given options
This statement is false because if the stock price changes after a firm conducts its share repurchase, then there are arbitrage opportunities. Thus, the price of the stock remains the same after a repurchase
