fm16 22 - After Debt, Before Rep. After Rep. Vop $2,500,000...

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Mini Case: 16 - 22 The repurchase itself will not change the stock price. If investors thought that the repurchase would increase the stock price, they would all purchase stock the day before, which would drive up its price. If investors thought that the repurchase would decrease the stock price, they would all sell short the stock the day before, which would drive down the stock price. The number of shares repurchased is: # repurchased = (D - D 0 ) / P # rep. = ($531,915 – 0) / $26.596 = 20,000. The number of remaining shares after the repurchase is: # remaining = n 0 - # rep. n = 100,000 – 20,000 = 80,000. Before Debt
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Unformatted text preview: After Debt, Before Rep. After Rep. Vop $2,500,000 $2,659,574 $2,659,574 + ST Inv. 531,915 0 VTotal $2,500,000 $3,191,489 $2,659,574 Debt 531,915 531,915 S $2,500,000 $2,659,574 $2,127,660 n 100,000 100,000 80,000 P $25.00 $26.60 $26.60 S $2,500,000 $2,659,574 $2,127,660 Cash distr. 531,915 Wealth $2,500,000 $2,659,574 $2,659,574 Notice that the value of the equity declines as more debt is issued, because debt is used to repurchase stock. But the total wealth of shareholders is the value of stock after the recap plus the cash received in repurchase, and this total is not changed by the repurchase....
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