Jensen Boat Works is an all equity ﬁrm that has 340,000 shares of stock outstanding. The company is in the process of borrowing $4 million at 8% interest to repurchase 80,000 shares of the
Outstanding stock. What is the value of this ﬁrm if you ignore taxes?
A) $15.8 million
B) $16.4 million
C) $17.0 million
D) $17.5 million
E) $18.1 million

Question

Quizplus · Accepted Answer

To calculate the value of the firm after the repurchase of shares, we need to use the following formula:

Value of firm = Number of outstanding shares x Price per share + Debt - Cash

We are given that the firm has 340,000 shares outstanding, and it wants to repurchase 80,000 shares. So, the number of shares outstanding after the repurchase will be:

340,000 - 80,000 = 260,000

We need to calculate the price per share that the firm will pay to repurchase the shares. To do this, we can use the following equation:

Price per share = Amount borrowed / Number of shares repurchased

Amount borrowed = $4 million
Number of shares repurchased = 80,000

Price per share = $4,000,000 / 80,000 = $50

Now, we can calculate the value of the firm after the repurchase of shares:

Value of firm = 260,000 x $50 = $13 million

Adding the debt of $4 million, we get:

Value of firm = $13 million + $4 million = $17 million

Therefore, the best choice is C) $17.0 million.

Jensen Boat Works Is an All Equity ﬁRm That Has