Abdul owns 200 shares of Intec Corp. stock. The firm is currently an all equity

Question

Abdul owns 200 shares of Intec Corp. stock. The firm is currently an all equity firm with a market value of $42,000,000 and 1,500,000 shares outstanding. Management of the firm is thinking of borrowing 20% of the current value of the firm and buying back shares with the funds. Even if management goes through with the proposed capital structure change, Abdul will keep all of his shares. There are no taxes or other market imperfections.

4. In numbers, what must Abdul do if the firm goes through with the recapitalization but Abdul wanted the cash flows from the firm as it is currently capitalized?

a) Abdul must borrow $1,120 from the bank and use the borrowed funds to buy more 40 more shares in the firm

b) Abdul must sell $1,120 worth of stock and at the same time borrow $1,120 from the bank

c) Abdul must sell $1,120 worth of stock and invest the $1,120 from the sale in a risk free security (i.e., the bank)

d) Abdul must invest $1,120 in a risk-free security (i.e., the bank) and at the same time buy $1,120 worth of stock in addition to what he currently owns

e) None of the above

Please show work! Thanks.

Explanation / Answer

4. what must Abdul do if the firm goes through with the recapitalization but Abdul wanted the cash flows from the firm as it is currently capitalized?

A).

c) Abdul must sell $1,120 worth of stock and invest the $1,120 from the sale in a risk free security (i.e., the bank)

please give positive rating, thank you.

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