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?

The answer is $16 million

Explanation:

Outstanding shares = 40,000

Shares of deceased shareholder = 2,500

Amount borrowed = $1m

We calculate price per share:

This is,

1,000,000 : 2,500

= $400

To get the total value of the firm:

[ (40,000 - 2,500) * 400] + 1m

= (37,500 * 400) + 1m

= 15,000,000 + 1,000,000

= $16,000,000

The total value of the firm without taxes is $16 million.