The Jean Outlet is an all-equity firm that has 64,000 shares of stock outstanding. The company has decided to borrow $120,000 to repurchase 1,500 shares of its stock from the estate of a deceased shareholder. What is the total value of the firm if you ignore taxes?

Question

Quizplus · Accepted Answer

The total value of the firm remains unchanged by the financing decision due to the Modigliani-Miller theorem, which states that in a world without taxes, bankruptcy costs, and asymmetric information, the value of a leveraged firm is the same as the value of an unleveraged firm. Therefore, the firm's value before and after the transaction is the same, and the borrowing is used to repurchase shares without affecting the overall firm value.

The Jean Outlet Is an All-Equity Firm That Has 64,000