The value of the firm if we ignore taxes would be $8.96 million.
Explanation:
Given information -
Thompson number of outstanding shares - 280,000
Price of 75,000 outstanding shares - $2.4 million
Note - here since Thompson is repurchasing its 75,000 outstanding shares, the interest of 5.5 % doesn't have to be paid yet, therefore this will not be taken in to account when taking out the value of the firm.
Formula for taking out value of firm =
Price for repurchasing of shares x Total number of outstanding share /
Threat of substitute product is one of the Porter's model that explains the impact of alternative product in a competitive market.
Alternative products are similar goods that are similar in quality and function compared to an existing product.
A customer can easily swap his choice for an alternative product more in a situation that there are favorable price differences as he believes that he will be able to derive the benefit of the goods purchased at a lower cost.
= Weightage of debt × after cost of debt + (Weightage of preferred stock) × (cost of preferred stock) + (Weightage of common stock) × (cost of common stock)
= (0.40 × 6%) + (0.10 × 11%) + (0.50 × 15%)
= 2.4% + 1.1% + 7.5%
= 11%
Simply we multiply the weightage with its cost so that the correct cost of capital can come based on weighted average