Thompson & Thomson is an all equity firm that has 500,000 shares of stock outstanding.The company is in the process of borrowing $10 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)$23.0 million
B)$24.8 million
C)$25.0 million
D)$26.2 million
E)$27.3 million

Question

Quizplus · Accepted Answer

The value of an all-equity firm is the market value of its equity. Since the firm is borrowing $10 million to repurchase 200,000 shares, the value of the firm remains unchanged at $25 million, as the repurchase is financed by debt and taxes are ignored.

Thompson & Thomson Is an All Equity Firm That Has