MDM has a D/E ratio of .5, a P/E of 10, and $50,000 in outstanding debt. The debt is selling at par and the shares of stock are selling at $25 a share. How many shares of stock will be outstanding
After MDM completes a $25,000 share repurchase program?

Question

Quizplus · Accepted Answer

First, we need to find the total value of MDM's outstanding debt. Since the debt is selling at par, it has a value of $50,000.

Next, we can use the D/E ratio to find the total equity value of the firm. The D/E ratio tells us that for every $1 of equity, MDM has $0.50 of debt. So:

D/E ratio = Debt / Equity
0.5 = 50,000 / Equity
Equity = 100,000

Now we can find the total value of the firm:

Total value = Debt + Equity
Total value = 50,000 + 100,000
Total value = 150,000

To find the number of outstanding shares, we need to divide the total value by the stock price:

Outstanding shares = Total value / Stock price
Outstanding shares = 150,000 / 25
Outstanding shares = 6,000

Next, we need to subtract the shares repurchased:

Outstanding shares after repurchase = 6,000 - (25,000/25)
Outstanding shares after repurchase = 6,000 - 1,000
Outstanding shares after repurchase = 5,000

Therefore, the correct answer is choice C) 3,000.

MDM Has a D/E Ratio of