D\'Anconia Copper is an all - equity firm with 60 million shares outstanding, wh

Question

D'Anconia Copper is an all - equity firm with 60 million shares outstanding, which arc currently trading at $20 per share. Last month. d'Anconia announced that it will change its capital structure by issuing $300 million in debt. The $200 million raised by this issue, phis another $200 million in cash that d'Anconia already has, will be used to repurchase existing shares of stock. Assume that capital markets are perfect. At the conclusion of this transaction, the value of share of d'Anconia Copper will be closest to: A. $25.00 B. $18.33 C.$20.00 D.$27.50

Explanation / Answer

The Amount to be shares to be repurchasd = $400,000,000

No. Of shares = 60,000,000

Price/Share = $20

So, total repurchase of shares = 400,000,000/20 = 20,000,000 shares

So, remaining shares = 60 Million - 20 Million = 40 Million

The price/share will not be affected by the repurchase transaction since only the total number of shares are reduced. So price/share remains at $20/share

So answer is $20 (Option C)

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