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25 April, 18:48

Charleston Mills is an all-equity firm with a total market value of $221,000. The firm has 8,000 shares of stock outstanding. Management is considering issuing $50,000 of debt at an interest rate of 7 percent and using the proceeds on a stock repurchase. Ignore taxes. How many shares can the firm repurchase if it issues the debt securities

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  1. 25 April, 20:59
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    1,476 shares can the firm repurchase if it issues the debt securities

    Explanation:

    In the question, it is mentioned that the market value is $221,000, the number of outstanding shares is 8,000 and the debt value is $50,000

    By considering the debt amount for the computation of the repurchase shares, we have to first compute the current market value, then compute the market value per share, after that the final answer would come by dividing the debt amount by market value per share.

    So, the current market value would be equal to

    = Total market value + debt

    = $221,000 + $50,000

    = $271,000

    Now, market value per share after the repurchase of shares would be

    = Current market value : number of outstanding shares

    = $271,000 : 8,000 shares

    = $33.875

    So, the number of shares after repurchase would equal to

    = Debt amount : market value per share

    = $50,000 : $33.875

    = 1,476 shares

    Hence, 1,476 shares can the firm repurchase if it issues the debt securities
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