Executive Cheese has issued debt with a market value of $120 million and has out
ID: 2689823 • Letter: E
Question
Executive Cheese has issued debt with a market value of $120 million and has outstanding 25 million shares with a market price of $25 a share. It now announces that it intends to issue a further $75 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 $95 million.--------------------------------------------------------------- a. Calculate the market price of the stock. b. How many shares can the company buy back with the $75 million of new debt that it issues? c. What is the market value of the firm (equity plus debt) after the change in capital structure? d. What is the debt ratio after the change in structure?Explanation / Answer
a)Market price = ((25x25) + 5)/25 = 25.2$
b)No of shares the company can buy = 75/25.2 = 2.976 million shares
c)The market value of the firm is unchanged E+D=(25 x 25.2)+ $125 mln = $755 million
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.