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8 May, 07:49

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

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  1. 8 May, 08:05
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    Solution:

    Price per share

    = Total Borrowing / No of shares repurchase

    = 251,000 / 21,500 = $ 11.67

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

    = (152,500 - 21,500) * 11.67

    = $1,274,095

    Debt = $ 251,000

    Value of the firm = Equity+Debt

    = 1,274,095 + 251,000

    = 1,525,095

    Value of the firm = $1,525,095
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