Question

Executive Chalk is financed solely by common stock and has outstanding 27 million shares with a market price of $14 a share. It now announces that it intends to issue $210 million of debt and to use the proceeds to buy back common stock. a. How is the market price of the stock affected by the announcement? b. How many shares can the company buy back with the $210 million of new debt that it issues? (Enter your answer in millions.) C-1. What is the market value of the firm (equity plus debt) after the change in capital structure? (Enter your answer in millions.) c-2. Did the market value of the firm change? d. What is the debt ratio after the change in structure? (Round your answer to 2 decimal places.) e. Who (if anyone) gains or loses? Answer is not complete. a. Effect on market price Shares repurchased Market value Stock price remains the same. million million Did the market value of the firm change? No Debt ratio Who (if anyone) gains or loses? No one gains or loses.

Answer 1

a. Stock price remains same , market price of stock not affected by the announcement.

Because Market price of stock affected by return on investments etc.

b. Market price of shares = $14 company can buy back the

210/14= 15 million

C. Market value of Firm = Equity + Debt

Equity = (27 million - 15 million ) × 14 = 168 million

Market value of debt = 168 +210= 378 million

Market value of Firm unchanged

Debt ratio = Debt /(debt +equity) = 210/378= 0.55

No gain or loses because market value of Firm and price unchanged.