Alderanian's is an all-equity firm that has 200,000 shares of stock outstanding.Neal, the financial vice president, is considering borrowing $300,000 at 8.5 percent interest to repurchase 50,000 shares.Ignoring taxes, what is the current value of the firm?
A)$700,000
B)$1,240,000
C)$925,000
D)$960,000
E)$1,200,000

Question

Quizplus · Accepted Answer

The current value of the firm is the market value of its equity, which is the number of shares outstanding multiplied by the price per share. Since the firm is all-equity and no other information is provided, the value of the firm is not affected by the borrowing plan. Therefore, the current value of the firm is $1,200,000.

Alderanian's Is an All-Equity Firm That Has 200,000 Shares of Stock