Skip to content

ACCA Strategic Professional · Advanced Financial Management · The role and responsibility of senior financial executive/advisor

Dalmar Ltd has 20 million shares at $4.00, with no debt. It plans a $10 million buy-back at the current market price, funded from surplus cash that is not needed and which earns nothing. Ignoring tax and signalling effects, what is the expected share price after the buy-back?

The share price stays at $4.00. The company's value falls from $80m to $70m after paying $10m, and shares fall from 20m to 17.5m after repurchasing 2.5m shares. Dividing $70m by 17.5m gives $4.00, so a market-price buy-back is value neutral.

  1. A$4.00Correct
  2. B$4.44
  3. C$3.60
  4. D$4.50

Explanation

Market value is $80m, including $10m of cash. Cash paid out is $10m, leaving $70m. Shares repurchased are 10m/4 = 2.5m, leaving 17.5m shares. $70m/17.5m = $4.00. A buy-back at market price leaves the price unchanged, so the $4.44 option wrongly divides by 15.75m... it ignores the cash reduction.

Did you get it right without looking?

One question tells you little. A timed set on The role and responsibility of senior financial executive/advisor shows your real accuracy, how long you take and where you lose marks.

Practise The role and responsibility of senior financial executive/advisorFree diagnostic mock

More The role and responsibility of senior financial executive/advisor questions