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22 February, 23:57

Uptown Interior Designs is an all equity firm that has 40,000 shares of stock outstanding. The company has decided to borrow $1 million to buy out the shares of a deceased stockholder who holds 2,500 shares. What is the total value of this firm if you ignore taxes?

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  1. 23 February, 00:12
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    The answer is $16 million

    Explanation:

    Outstanding shares = 40,000

    Shares of deceased shareholder = 2,500

    Amount borrowed = $1m

    We calculate price per share:

    This is,

    1,000,000 : 2,500

    = $400

    To get the total value of the firm:

    [ (40,000 - 2,500) * 400] + 1m

    = (37,500 * 400) + 1m

    = 15,000,000 + 1,000,000

    = $16,000,000

    The total value of the firm without taxes is $16 million.
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