Thompson amp; Thomson is an all-equity firm that has 280,000 shares of stock outstanding. The company is in the process of borrowing $2.4 million at 5.5 percent interest to repurchase 75,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes?

Question

Nolan Mccann

Business

19 May, 18:24

Thompson amp; Thomson is an all-equity firm that has 280,000 shares of stock outstanding. The company is in the process of borrowing $2.4 million at 5.5 percent interest to repurchase 75,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes?

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Answers (1)

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Desmond Lewis · Answer 1

The value of the firm if we ignore taxes would be $8.96 million.

Explanation:

Given information -

Thompson number of outstanding shares - 280,000

Price of 75,000 outstanding shares - $2.4 million

Note - here since Thompson is repurchasing its 75,000 outstanding shares, the interest of 5.5 % doesn't have to be paid yet, therefore this will not be taken in to account when taking out the value of the firm.

Formula for taking out value of firm =

Price for repurchasing of shares x Total number of outstanding share /

Shares repurchased

= $2.4 million x 280,000 / 75,000

= $8.96 million