Question

Digital Fruit is financed solely by common stock and has outstanding 37 million shares with a market price of $10 a share. It now announces that it intends to issue $280 million of debt and to use the proceeds to buy back common stock. There are no taxes. a. What is the expected market price of the common stock after the announcement? b. How many shares can the company buy back with the $280 million of new debt that it will issue? (Enter your answer in millions rounded to 1 decimal place.) c. What is the market value of the firm (equity plus debt) after the change in capital structure? (Enter your answer in millions.) d. What is the debt ratio after the change in capital structure? (Enter your answer as a whole percent.) a. Maine per share million shares Market price b. The buyback will be c. Market value d. Debt ratio million

Answer 1

a)
Market price = 10 per share

The market price of the stock is not affected by the announcement.

b)
The buyback will be = $280 million / $10 = 28.0 million shares

c)
Market value = (37 - 28) * 10 + 280 = 370 million

d)
Debt ratio = Debt/market value = 280/370 = 76%