Question

Kopes Industries is an all-equity firm with a total market value of $320,000. The firm has 15,000 shares of stock outstanding. Management is considering issuing $100,000 of debt at an interest rate of 8 percent and using the proceeds on a stock repurchase. Ignore taxes. How many shares can the firm repurchase if it issues the debt securities?

Answer 1

Answer

STEP 1 : Calculate Current Markkrt Price of Share {MPS}

MPS = Total Market Value of Firm / No. of Share Currently Outstanding

MPS = 320000 / 15000

MPS = $ 21.33333333 per share

STEP 2 : Calculate No. of Share a Firm can Repurchase

No. of Shares that can be Repurchased = Proceeds from Debt / MPS

= 100000 / 21.33333333

= 4687.5 shares {You can Round off as per your question's requirement}

NOTE : SINCE ROUNDING OFF INFORMATION IS NOT MENTIONED IN QUES, I AM NOT ROUNDING OF THE VALUES. BUT HOPE YOU HAVE UNDERSTOOD THE METHODOLOGY TO SOLVE THE QUES.