Epiphany is an all-equity firm with an estimated market value of $300,000. The firm sells $100,000 of debt and uses the proceeds to purchase outstanding equity. Compute the weight in equity and the weight in debt after the proposed financing and repurchase of equity.

Question

Quizplus · Accepted Answer

After selling $100,000 of debt and using it to repurchase equity, the firm will have $200,000 in equity ($300,000 - $100,000) and $100,000 in debt. The total value of the firm remains $300,000. The weight in equity is $200,000/$300,000 = 0.67, and the weight in debt is $100,000/$300,000 = 0.33.

Epiphany Is an All-Equity Firm with an Estimated Market Value