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6 July, 11:47

The Gable Inn is an all-equity firm with 16,000 shares outstanding at a value per share of $14.50. The firm is issuing $50,000 of debt and using the proceeds to reduce the number of outstanding shares. How many shares of stock will be outstanding once the debt is issued

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  1. 6 July, 15:30
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    12,552 shares

    Explanation:

    Data provided:

    Initial outstanding shares of the firm = 16,000 shares

    Value of each share = $14.50

    Debt issued = $50,000

    Now,

    the number of shares used for issuing for $50,000 debt

    = Debt issued / value of each share

    on substituting the respective values, we have

    the number of shares used for issuing for $50,000 debt

    = $50,000 / $14.50

    = 3448.27 ≈ 3448 shares

    Now,

    The shares of stock that are outstanding once the debt is issued =

    = Initial outstanding shares - shares used for issuing for $50,000 debt

    = 16,000 - 3448

    = 12,552 shares
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