Question
Q2 (20 marks) Randy, Inc. has a shareholding structure of 100% with equity. As per the data, the company holds 100,000 shares of stock outstanding
Q2 (20 marks) Randy, Inc. has a shareholding structure of 100% with equity. As per the data, the company holds 100,000 shares of stock outstanding with a market price of $5 per share. As per the results, Total earnings for the most recent year are $50,000. In addition, The company has cash of $25,000 in excess of what is necessary to fund its positive NPV projects. The firm is forecasting to utilize the cash to pay an extra dividend of $25,000 or, alternatively, to repurchase $25,000 of stock. The company has other assets worth $475,000 (market value). Also assume there are no transaction costs, taxes, or other market imperfections. It is being assumed that the firm uses the $25,000 excess cash to buy back stock at $5 per share. You own 1,000 shares before the repurchase and this comprises your total wealth. In case, If you sold none of your shares back to the firm, what is your total wealth after the repurchase is completed?
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