Thompson & Thomson is an all equity firm that has 500,000 shares outstanding.The company is in the process of borrowing €8 million at 9% interest to repurchase 200,000 shares of the outstanding equity.What is the value of this firm if you ignore taxes?
A)€20.0 million
B)€20.8 million
C)€21.0 million
D)€21.2 million
E)€21.3 million

Question

Quizplus · Accepted Answer

In a no-tax scenario, the value of the firm remains unchanged by the capital structure. Therefore, the value of the firm is the same as the initial market value of equity, which is €20 million (500,000 shares x €40 per share).

Thompson & Thomson Is an All Equity Firm That Has