Executive Chalk Is financed solely by common stock and has outstanding 25 million shares with a market price of $10 a share. It now announces that intends to issue 160 million of new debt and to use the proceeds to buy back common stock. Show all your work.
a. How is the market price of a stock affected by the announcement?
b. How many shares can the company buy with the 160 million of new debt that it issues?
c. What is the market value of a firm (equity plus debt) after the change in capital structure?
d. What is the debt ratio after the change in structure?
e. Who (if anyone) gains or losses?
a. The market price of stock is unaffected (MMI).
b. It can buy ...
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