Wookie's is an all-equity firm that has 250,000 shares of stock outstanding.Neal, the financial vice president, is considering borrowing $450,000 at 7 percent interest to repurchase 60,000 shares.Ignoring taxes, what is the current value of the firm?

Question

Quizplus · Accepted Answer

The value of an all-equity firm is the market value of its equity. Since the firm is considering borrowing to repurchase shares, the current value of the firm is the total value of its equity before the repurchase, which is $1,875,000 (250,000 shares x $7.50 per share).

Wookie's Is an All-Equity Firm That Has 250,000 Shares of Stock