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Taunton's is an all-equity firm that has 152,500 shares of stock outstanding. The CFO is considering...

Taunton's is an all-equity firm that has 152,500 shares of stock outstanding. The CFO is considering borrowing $251,000 at 7 percent interest to repurchase 21,500 shares. Ignoring taxes, what is the value of the firm? $1,865,127 $2,191,199 $1,780,349 $2,034,684 $2,300,758

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Expert Solution

Price per share

= Total Borrowing /Number of shares repurchased

= 251,000 /21,500 = $ 11.67441860

Total Equity   = (Shares outstanding-Shares repurchased) * Price per share          

                     = (152,500 -21,500 )*11.67441860

                     = $1529348.84

Now, Debt = $ 251,000

Value of the firm = Equity Value+Debt Value

                           = 1529348.84 + 251,000

                          = 1780348.84

Value of the firm = 1780349

Hence option c is correct.

jeff jeffy answered 1 year ago
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