CorpFinance.Ivan.Unit-7

CorpFinance.Ivan.Unit-7 - Solution Computation of the...

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Question: Executive Chalk is financed solely by common stock and has outstanding 25 million shares with a market price of $10 a share. It now announces that it intends to issue $160 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? Solution: As Per the above Announcement the market price of the stock will not effected by this announcement b. How many shares can the company buy back with the $160 million of new debt that it issues? Solution: Computation of the No of Shares can company Buy Back Total Amount of Debt issued 160 Millions Market value of the share is $10.00 No of shares can buy back 160 10 16 Millions Hence the No of Shares Can buy Back is 16 Millions c. What is the market value of the firm (equity plus debt) after the change in capital structure?
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Unformatted text preview: Solution: Computation of the Market Value of the Firm After Changing the Capital Structure Total no of shares outstanding 25 Millions No of shares can buy back 16 Millions No of shares still Outstanding 9 Millions Market Value of the Firm = Debt + Equity Debt 160 Millions Equity 90 Millions Market Value of the Firm = 250 Millions Hence the Market Value of the Firm is 250 Millions d. What is the debt ratio after the change in structure? Solution: Computation of the Debt Ratio After Change in Structure Debt 160 Millions Equity 90 Millions Debt Ratio = 0.64 Hence the Debt Ratio is 0.64 e. Who (if anyone) gains or loses? Solution: No one Can Gain and No one Can Loss...
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