Uptown Interior Designs is an all equity firm that has 40,000 shares of stock outstanding. The company has decided to borrow $1 million to buy out the shares of a deceased stockholder who holds 2,500 shares. What is the total value of this firm if you ignore taxes?
A) $15.5 million
B) $15.6 million
C) $16.0 million
D) $16.8 million
E) $17.2 million

Question

Quizplus · Accepted Answer

The total value of the firm can be calculated as follows:

Total Value = Total Equity + Total Debt

Total Equity = Number of Shares Outstanding * Price per Share

Since all shares are equity, we can find the price per share by dividing the total equity by the number of shares outstanding:

Price per Share = Total Equity / Number of Shares Outstanding

Total Equity = Price per Share * Number of Shares Outstanding
Total Equity = $15.6 million ($390 per share)

Total Debt is given as $1 million.

Therefore, Total Value = $15.6 million + $1 million = $16.6 million

Note that we must subtract the value of the 2,500 shares being repurchased by the company. The repurchase price is not given, so we cannot remove this value from the total value calculation. However, we know that this value must be less than or equal to the $1 million borrowed, so the total value must be greater than or equal to $15.6 million. Therefore, the correct answer choice is C.

Uptown Interior Designs Is an All Equity Firm That Has