Asked by Timofei Bolshev on Jun 25, 2024
Verified
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?
A) $15.5 million
B) $15.6 million
C) $16.0 million
D) $16.8 million
E) $17.2 million
Equity Firm
A company that invests in businesses, typically by purchasing equity stakes, with the aim of earning returns through dividends or capital appreciation.
Shares Outstanding
The total number of shares of a company that are currently owned by shareholders, including both public investors and company officers or insiders.
Borrow
To receive something of value with the promise to return it or its equivalent value at a future date.
- Assess the effects of leveraged buyouts and the consequences of using borrowed funds to buy back shares on corporate value and EPS.
Verified Answer
NC
Nicole CulbreathJun 26, 2024
Final Answer :
C
Explanation :
Total value of the firm can be calculated using the formula:
Total Value = Equity Value + Debt Value
Equity Value = Number of shares outstanding x Market price per share
Equity Value = 40,000 shares x $400 per share (given in the previous question)
Equity Value = $16 million
Debt Value = Amount of Debt
Debt Value = $1 million
Total Value = Equity Value + Debt Value
Total Value = $16 million + $1 million
Total Value = $16 million
Therefore, the total value of the firm is $16 million. The best choice is C.
Total Value = Equity Value + Debt Value
Equity Value = Number of shares outstanding x Market price per share
Equity Value = 40,000 shares x $400 per share (given in the previous question)
Equity Value = $16 million
Debt Value = Amount of Debt
Debt Value = $1 million
Total Value = Equity Value + Debt Value
Total Value = $16 million + $1 million
Total Value = $16 million
Therefore, the total value of the firm is $16 million. The best choice is C.
Learning Objectives
- Assess the effects of leveraged buyouts and the consequences of using borrowed funds to buy back shares on corporate value and EPS.