Thompson & Thomson is an all equity firm that has 500,000 shares of stock outstanding. The company is in the process of borrowing $8 million at 9% interest to repurchase 200,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes?
A) $20.0 million
B) $20.8 million
C) $21.0 million
D) $21.2 million
E) $21.3 million

Question

Quizplus · Accepted Answer

The value of the firm is the sum of the value of the debt and the value of the equity. The value of the debt is $8 million. The value of the equity is the number of shares outstanding multiplied by the price per share. The price per share is the value of the firm divided by the number of shares outstanding. So, the value of the firm is:Value of the firm = Value of the debt + Value of the equityValue of the firm = $8 million + (500,000 shares * Price per share)Value of the firm = $8 million + (500,000 shares * Value of the firm / 500,000 shares)Value of the firm = $8 million + Value of the firmValue of the firm = $16 millionThe value of the firm is $16 million.

Thompson & Thomson Is an All Equity Firm That Has