Horizon Landscape currently has 62,000 shares of stock outstanding and no debt. The price per share is $18.50. The firm is considering borrowing funds at 7 percent interest and using the proceeds to repurchase 12,000 shares of stock. Ignore taxes. How much is the firm borrowing?
Stock represents ownership in a company which has been issued in exchange for capital. Investors may obtain stock as compensation or through purchase. Outstanding stock is either preferred or common in nature, and the stock type will determine the stockholders dividend treatment.
Answer and Explanation:
To repurchase the shares, the firm will need to borrow $222,000 to repurchase the 12,000 shares (12,000 shares x $18.50 per share).
- Note: The borrowing figure of $222,000 is not equal to the total amount to be repaid since interest must be paid on the borrowing. Thus, the cash outflow for the borrowing would total $237,540 ($222,000 x 1.07), not $222,000.
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from Financial Accounting: Help and ReviewChapter 8 / Lesson 7