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?

b. How many shares can the company buy back with the $160 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?

e. Who (if anyone) gains or loses?

Now try the next question.

AppendixLO1