Epiphany is an all-equity firm with an estimated market value of $500,000.The firm sells $200,000 of debt and uses the proceeds to purchase outstanding equity.Compute the weight in equity and the weight in debt after the proposed financing and repurchase of equity.

Question

Quizplus · Accepted Answer

After selling $200,000 of debt and using it to repurchase equity, the firm has $300,000 in equity and $200,000 in debt. The weight in equity is $300,000/$500,000 = 0.6, and the weight in debt is $200,000/$500,000 = 0.4.

Epiphany Is an All-Equity Firm with an Estimated Market Value