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Shares of the Mechanical Fruit Company currently trade for $15. Analysts rate the company a hold and regard it as fairly valued at its current price. The company has announced that it intends to spend $233.8000 million on an open market repurchase. In their press release management claims that the company's shares are occasionally undervalued and that buying shares at those undervalued prices represents a good investment Assume that the company is able to repurchase shares at a price of $14.00. Answer the questions that follow. There are 250 million shares outstanding prior to the repurchase. Assume that the company is at equity financed.
1. What fraction of shares does the company repurchase?
2. What stock price prevails after the repurchase?
3. What is the aggregate gain in value to all the shareholders who do not sell any shares as a result of the repurchase of undervalued shares? In other words, if you owned all of the shares that were not repurchased, then what is your profit (loss) from before the repurchase to afterwards?
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