Question

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?

Answer 1

The value of the firm is $1,485,000

Step-by-step explanation:

For computing the value of the firm, first, we have to compute the price per share which equals to

= Borrowed amount ÷ repurchase shares

= $220,000 ÷ 20,000

= $11 per share

Now, the value of the firm should be computed. The formula is used which is shown below:

= Price per share × Number of outstanding shares

= $11 × 135,000 shares

= $1,485,000

Hence, the value of the firm is $1,485,000