Pewter & Glass is an all equity firm that has 60,000 shares of stock outstanding

Question

Pewter & Glass is an all equity firm that has 60,000 shares of stock outstanding. The company is in the process of borrowing $625,000 at 9 percent interest to repurchase 25,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes? HINT: You know the number of shares outstanding, but you don't know the price per share. You can, however, determine the share price based on how many shares you can buy back with the debt the company is borrowing.

$625,000

$1,500,000

$510,000

None of these

$60,000

Explanation / Answer

Value of One Share will be=Amount Borrowed for Repurchase/No. of Shares Repurchased=$625000/25000=25

Therefore Value of the Company=Price of the Share x Shares Outstanding=$25x60000=$1500000

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