Flour Mills is an all-equity firm with a total market value of $891,860.The firm has 38,000 shares of stock outstanding.Management is considering issuing $275,000 of debt at an interest rate of 7.5 percent and using the proceeds on a stock repurchase.Ignore taxes.How many shares can the firm repurchase if it issues the debt securities? (Round the number of shares repurchased down to the nearest whole share.)
A)11,717 shares
B)11,618 shares
C)11,647 shares
D)11,656 shares
E)11,699 shares

Question

Quizplus · Accepted Answer

The correct answer is A.The firm can repurchase 11,717 shares if it issues the debt securities.The firm's total market value is $891,860. The firm has 38,000 shares of stock outstanding. So, the current market price per share is $891,860 / 38,000 = $23.49.The firm is considering issuing $275,000 of debt at an interest rate of 7.5 percent. So, the annual interest expense will be $275,000 * 7.5% = $20,625.The firm will use the proceeds from the debt issuance to repurchase shares. So, the number of shares that the firm can repurchase is $275,000 / $23.49 = 11,717 shares.

Flour Mills Is an All-Equity Firm with a Total Market