The Nantucket Nugget Is Unlevered and Is Valued at $640,000

question 40

Essay

The Nantucket Nugget is unlevered and is valued at $640,000. Nantucket is currently deciding whether including debt in their capital structure would increase their value. Under consideration is issuing $300,000 in new debt with an 8% interest rate. Nantucket would repurchase $300,000 of stock with the proceeds of the debt issue. There are currently 32,000 shares outstanding and their effective marginal tax bracket is zero. What is the change in value and how many shares of stock will be repurchased?

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Definitions:

Average Revenue

The revenue received per unit of output sold.

Quantity Demanded

The amount of a product that consumers are willing and able to purchase at a given price.

Price

Price is the amount of money expected, required, or given in payment for something, reflecting the value of goods or services in monetary terms.

Motivational Concepts

Refers to the theories and principles that explain what drives and influences individuals to act and behave in certain ways.