Executive Cheese has issued debt with a market value of $114.91 million and has outstanding 14.30...
Executive Cheese has issued debt with a market value of $114.91 million and has outstanding 14.30 million shares with a market price of $10 a share. It now announces that it intends to issue a further $64.39 million of debt and to use the proceeds to buy back common stock. Debtholders, seeing the extra risk, mark the value of the existing debt down to $62 million.
a. Calculate the market price of the stock following the announcement. (Round your answer to 2 decimal places.)
Price of the stock $
b. How many shares can the company buy back with the $64.39 million of new debt that it issues? (Enter your answer in millions. Round your answer to 1 decimal place.)
Number of shares million
c. What is the market value of the firm (equity plus debt) after the change in capital structure? (Enter your answer in millions. Round your answer to 2 decimal places.)
Market value $ million
d. What is the debt ratio after the change in structure? (Round your answer to 2 decimal places.)
Debt ratio
e. Who (if anyone) gains or loses?
| The investors in the existing debt lose while the shareholders gain. | |
| The investors in the existing debt gain while the shareholders lose. | |
| No one gains or loses. |
Homework Answers
a. Current Market Value of Company = Equity + Debt
Current Market Value of Company = 14.30 Million * 10 + 114.91 Million
Current Market Value of Company = 143 Million + 114.91 Million
Current Market Value of Company = $257.91 Million
Value of Equity after bringing down debt = $257.91 Million - $62 Million
Value of Equity after bringing down debt = $195.91 Million
market price of the stock following the announcement = Value of Equity / 14.30 Million Shares
market price of the stock following the announcement = $195.91 / 14.30 Million Shares
Market price of the stock following the announcement = $13.70 Per Share
b. Shares can be Buy Back by the company
Shares can be Buy Back by the company = Debt Issue / Market Price
Shares can be Buy Back by the company = $64.39 Million / 13.70
Shares can be Buy Back by the company = 4700000 Shares
c. Market Value = Debt + Equity
Market Value = $62 Million + $64.39 Million + $13.70 * 9.6 Million
Market Value = $62 Million + $64.39 Million + $131.52 Million
Market Value = $257.91 Million
d. Debt Ratio = Value of Debt / Value of Equity
Debt Ratio = $62 + 64.39 Million / 131.52 Million
Debt Ratio = 0.96
e.
| The investors in the existing debt lose while the shareholders gain. |
Cause the current debt holders value will be reduced from $114.91 Million to 62 Million and share holders will captures the loss of debt holders.
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