Question

Taunton's is an all-equity firm that has 159,000 shares of stock outstanding. The CFO is considering borrowing $329,000 at 8 percent interest to repurchase 28,000 shares. Ignoring taxes, what is the value of the firm?

Answer 1

Answer:

$1,868,250

Explanation:

Given:

Outstanding stocks = 159,000 shares

The CFO is considering borrowing = $329,000

Interest rate = 8%

Shares repurchase = 28,000

Now,

Price per share = $\frac{\textup{329,000}}{\textup{28,000}}$

or

Price per share = $11.75

Thus,

value of the firm = Outstanding stocks × Price per share

or

value of the firm = 159,000 × $11.75

or

value of the firm = $1,868,250