$1$

Executive Chalk is financed solely by common stock and has outstanding $34$ million shares with a market price of $$28$ a share. It now announces that it intends to issue $$420$ 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 $$420$ million of new debt that it issues?

$10$ Note: Enter your answer in millions.

c$-1.$ What is the market value of the firm $($equity plus debt$)$ after the change in capital structure?

Note: Enter your answer in millions.

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c$-2.$ Did the market value of the firm change?

d$.$ What is the debt ratio after the change in structure?

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Note: Round your answer to $2$ decimal places.

e$.$ Who $($if anyone$)$ gains or loses?

References

$\backslash$table$[[$a$.$ Effect on market price,,$],[$b$.$ Shares repurchased,,million$],[$c$-1.$ Market value,,million$],[$c$-2.$ Did the market value of the firm change?,,$],[$d$.$ Debt ratio,,$],[$e$.$ Who $($if anyone$)$ gains or loses?,,$]]$

Me

Graw

Prey

$1$ of $6$

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