Question

Taunton's is an all-equity firm that has 152,500 shares of stock outstanding. The CFO is considering borrowing $251,000 at 7 percent interest to repurchase 21,500 shares. Ignoring taxes, what is the value of the firm

Answer 1

Solution:

Price per share  

= Total Borrowing /No of shares repurchase

= 251,000 /21,500 = $ 11.67

Total Equity   = (Shares outstanding-Shares repurchased) * Price per share          

                     = (152,500 -21,500 )*11.67

                     = $1,274,095

Debt = $ 251,000

Value of the firm = Equity+Debt

                           =  1,274,095 + 251,000

                          = 1,525,095

Value of the firm = $1,525,095