
Motiwala Markets is an all-equity firm that has 500,000 shares of stock outstanding. The company is in the process of borrowing $2.2 million at five percent interest to repurchase 40,000 of the firm's outstanding shares. Ignore taxes. What will be the market value of equity after the repurchase?

Multiple Choice

$25.3 million

$20.9 million

$23.1 million

$18.7 million

$27.5 million

To find the market value of equity after the repurchase, we can follow these steps:

1. **Initial Market Value of Equity**: The firm is an all-equity firm, meaning its value before the repurchase is based purely on the stock. Since the company plans to repurchase 40,000 shares by borrowing $2.2 million, the price per share can be calculated.

   \[
   \text{Price per share} = \frac{\text{Amount borrowed}}{\text{Number of shares repurchased}} = \frac{2.2 \text{ million}}{40,000} = 55 \text{ dollars per share}.
   \]

2. **Total Market Value of the Firm before Repurchase**: The total market value of the firm's equity can be calculated by multiplying the price per share by the total number of shares outstanding before the repurchase:

   \[
   \text{Market Value of Equity before Repurchase} = 55 \times 500,000 = 27.5 \text{ million dollars}.
   \]

3. **Market Value of Equity after the Repurchase**: After the repurchase, the company will owe $2.2 million in debt. Therefore, the market value of equity will be the total value of the firm minus the new debt:

   \[
   \text{Market Value of Equity after Repurchase} = 27.5 \text{ million} - 2.2 \text{ million} = 25.3 \text{ million}.
   \]

Thus, the **market value of equity after the repurchase** is **$25.3 million**.

### Correct Answer: 
**$25.3 million**

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Do you want further clarification or details on any step? Here are five related questions to extend the understanding:

1. How does the stock repurchase affect the firm's debt-to-equity ratio?
2. What would be the impact of taxes on the market value of equity?
3. How would a change in interest rates affect the market value after the repurchase?
4. What happens to the firm's share price after the repurchase?
5. How is shareholder wealth affected by a share repurchase?

**Tip:** Share repurchases can increase earnings per share (EPS) by reducing the number of shares outstanding, but they also increase the firm's financial leverage.

Motiwala Markets is an all-equity firm that has 500,000 shares of stock outstanding. The company is in the process of borrowing $2.2 million at five percent interest to repurchase 40,000 of the firm's outstanding shares. Ignore taxes. What will be the market value of equity after the repurchase?

Understand how to calculate the market value of equity after Motiwala Markets repurchases 40,000 shares using a $2.2 million loan. This problem demonstrates key financial concepts like debt-equity structure and share repurchase impact. Suitable for finance students.

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