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D'Anoconia copper is an all equity firm with 60 million shares outstanding, which are currently trading at $20 per share. Last month , d'Anconia announced that it will change its capital structure by issuing $300 million in debt. The $200 million raised by the issue, plus another $200 million in cash that d'Anconia already has, will be used to repurchase existing shares of stock. Assume that capital markets are perfect.

At the conclusion of this transaction, the number of shares that d'Anconia copper will have outstanding is closest to:

1. 15 million
2. 40 million
3. 5 million
4. 20 million.

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Solution Preview

Funds raised by debt offering $200,000,000
Cash on hand 200,000,000
Total cash for share ...

Solution Summary

This solution illustrates how to determine the effect of a capital restructuring on the number of common shares outstanding.

$2.19