Simpson’s is an all equity firm that has 400,000 shares of stock outstanding. Th

Question

Simpson’s is an all equity firm that has 400,000 shares of stock outstanding. The company is in the process of borrowing $1.5 million at 5 percent interest to repurchase 30,000 of the firm’s outstanding shares. Ignore taxes. What will be the market value of equity after the repurchase? A. $19.8 million B. $18.5 million C. $19.2 million D. $18.9 million E. $20.0 million Simpson’s is an all equity firm that has 400,000 shares of stock outstanding. The company is in the process of borrowing $1.5 million at 5 percent interest to repurchase 30,000 of the firm’s outstanding shares. Ignore taxes. What will be the market value of equity after the repurchase? A. $19.8 million B. $18.5 million C. $19.2 million D. $18.9 million E. $20.0 million A. $19.8 million B. $18.5 million C. $19.2 million D. $18.9 million E. $20.0 million

Explanation / Answer

Answer :option B. $18.5 millions

Market value of equity after repurchase

= (400,000*$1.5 million /30,000) - $1.5 million

= $20.0 million - $1.5 million

=18.5 million

=

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