CFA Practice Question

CFA Practice Question

Consider a firm that has physical assets that the market believes will produce a perpetual expected profits of $25M a year of riskiness such that the discount rate is 12.5%. The firm also has $100M liquid assets (convertible to cash at short notice), and 10M stock outstanding. The liquid assets are invested in securities that have the same ROE as the firm and pay out all profits as dividends. There are no taxes.

The firm repurchases its own shares for $60M by using cash obtained by selling its liquid assets. This repurchase announcement does not lead the market to change its beliefs about earnings from the physical assets of the firm. The firm pays market price for repurchased shares. How many shares will the firm be able to repurchase with the $60M?
A. $1M
B. $2M
C. $4M
Explanation: Price does not change from $30 following repurchase announcement as no new information is revealed.

User Contributed Comments 4

User Comment
chantal Market capitalisation is asset 25$ divided by 12.5$= 200,000, 000$ plus 100,000,000$ in cash, no mention od debt to assume total mkt cap of 300MIL$, ie 30$ per share
chandsingh I was not cure whether we should add anything for the returns on the liquid assets as that is generating additional returns to the 25mil profit?
moneyguy come on Analyst Notes. We are counting on these explanations to learn from. More notes for solutions, please!!!!!!
GBolt93 Think it means 25/.125=200m + 100m liquid=300m
300m EV/10m stock outstanding=$30 per share. 60m/30=2m shares.
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