Question

Thompson & Thomson is an all equity firm that has 500,000 shares of stock outstanding. The company is in the process of borrowing $8 million at 9% interest to repurchase 200,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes?

Answer 1

Answer: $20,000,000

Explanation:

From the information given in the question, we have to calculate the value per share first. This will be:

= 8,000,000/200,000

= 40

Then, the value of the firm will be equal to the shares of outstanding stick multiplied by the value per share. This will be:

=500,000 × 40

=$20,000,000