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Taunton's is an all-equity firm that has 153,000 shares of stock outstanding. The CFO is considering...

Taunton's is an all-equity firm that has 153,000 shares of stock outstanding. The CFO is considering borrowing $257,000 at 8 percent interest to repurchase 22,000 shares. Ignoring taxes, what is the value of the firm?

Multiple choice..

$1,787,318

$2,309,765

$2,199,776

$2,042,649

$1,872,429

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Answer #1

Answer is $1,787,318

Number of shares under all-equity plan = 153,000
Value of Debt = $257,000
Number of shares repurchased = 22,000

Number shares outstanding = Number of shares under all-equity plan - Number of shares repurchased
Number shares outstanding = 153,000 - 22,000
Number shares outstanding = 131,000

Price per share = Value of Debt / Number of shares repurchased
Price per share = $257,000 / 22,000
Price per share = $11.68182

Value of firm = Price per share * Number shares outstanding + Value of Debt
Value of firm = $11.68182 * 131,000 + $257,000
Value of firm = $1,530,318 + $257,000
Value of firm = $1,787,318

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