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Finding Debt, Equity and Number of Shares: Gulf Oil

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Gulf Oil Company plans to buy back 1 million shares of its own stock from its cash reserves at $40 a share. This will increase the bankruptcy costs by $10 million, and the debt/assets ratio from 20% to 25%. Using careful reasoning, find the following:

(A) The total value of the company, its debt and equity, before the buyback.

(B) The total value of the company, its debt and equity, after the buyback.

(C) The number of shares of stock before and after the buyback.

(D) The price per share before and after the buyback.

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Solution Summary

Provides steps necessary to find the debt, equity and number of shares for Gulf Oil Company.

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Question A
D/A = 20%
D = 20%A
D/(A - 40million) = 25%
20%A/(A - 40million) = 25%
20%A = 25% (A - 40million)
20%A = 25%A - 10million
25%A - 20%A ...

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