Epiphany is an all-equity firm with an estimated market value of $300 000. The firm sells $100 000 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 the firm sells $100,000 of debt and uses it to repurchase equity, the total market value of the firm becomes $200,000 in equity ($300,000 original equity - $100,000 used to repurchase equity) and $100,000 in debt. Therefore, the weight in equity is $200,000 / ($200,000 + $100,000) = 0.67, and the weight in debt is $100,000 / ($200,000 + $100,000) = 0.33.

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