United Landscaping is an all equity ﬁrm that has 140,000 shares of stock outstanding. The company is in the process of borrowing $1.2 million at 8% interest to repurchase 30,000 shares of the
Outstanding stock. What is the value of this ﬁrm if you ignore taxes?

Question

Quizplus · Accepted Answer

The value of the firm remains unchanged by the repurchase of shares if taxes are ignored, according to the Modigliani-Miller theorem. Therefore, the value of the firm is the same as before the repurchase, which is the number of shares outstanding (140,000) multiplied by the price per share. Since the firm is borrowing $1.2 million to repurchase 30,000 shares, the price per share is $1.2 million / 30,000 = $40. Thus, the firm's value is 140,000 shares * $40 = $5.60 million.

United Landscaping Is an All Equity ﬁRm That Has 140,000