Uptown Interior Designs is an all equity firm that has 40,000 shares outstanding.The company has decided to borrow €1 million to buy out the shares of a deceased equityholder who holds 2,500 shares.What is the total value of this firm if you ignore taxes?

Question

Quizplus · Accepted Answer

Total equity of the firm = 40,000 shares
Value of 1 equity share = Total Equity/Number of shares = 40,000 shares
Value of 40,000 shares = Total Equity = 40,000 * Value of 1 equity share
Let the value of 1 equity share be x
Thus, Total Equity = 40,000 * x
Now, the firm borrows €1 million to buy out 2,500 shares from a deceased shareholder. So the firm's equity share capital will decrease by €1 million while its assets will remain unchanged.
Thus, New Total Equity = Total Equity - Borrowed Amount
                      = 40,000 * x - €1 million
                      = €1.6 million - €1 million (x = €0.015)
Now, to calculate the value of the firm:
Value of the firm = Total Equity + Borrowed Amount
                         = New Total Equity + Borrowed Amount
                         = €1.6 million + €1 million
                         = €2.6 million
Therefore, the total value of this firm is €16 million (€2.6 million/0.015). 
Hence, the best choice is C.

Uptown Interior Designs Is an All Equity Firm That Has