Henderson's is an all-equity firm that has 135,000 shares of stock outstanding. Neal, the financial vice-president, is considering borrowing $220,000 at 7.25 percent interest to repurchase 20,000 shares. Ignoring taxes, what is the value of the firm?
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Answered on
Given :
Number of shares = 135,000
Now, Neal is buying 20,000 shares at $220,000. So, value of 1 share = $220,000/20,000
= $11
Then,
Value of firm = Number of shares × value of 1 share
= 135,000 × 11
= $1,485,000
Hence, the value of the firm is $1,485,000.