Thompson & Thomson is an all-equity firm that has 280,000 shares of stock outstanding.The company is in the process of borrowing $2.4 million at 5.5 percent interest to repurchase 75,000 shares of the outstanding stock.What is the value of this firm if you ignore taxes?
A)$8,960,000
B)$9,240,000
C)$10,710,000
D)$12,500,000
E)$11,360,000

Question

Quizplus · Accepted Answer

The value of the firm is the sum of the value of the equity and the value of the debt. The value of the equity is the number of shares outstanding times the price per share. The price per share is the value of the firm divided by the number of shares outstanding. The value of the debt is the amount of the debt times the interest rate.In this case, the value of the equity is 280,000 shares times the price per share. The price per share is the value of the firm divided by the number of shares outstanding. The value of the debt is $2.4 million times 5.5 percent.The value of the firm is the sum of the value of the equity and the value of the debt. The value of the equity is 280,000 shares times the price per share. The price per share is the value of the firm divided by the number of shares outstanding. The value of the debt is $2.4 million times 5.5 percent.The value of the firm is $8,960,000.

Thompson & Thomson Is an All-Equity Firm That Has 280,000