Question
DA is an all equity firm with 60 million shares outstanding, which are currently trading at $20 per share. Last month, DA announced that it
DA is an all equity firm with 60 million shares outstanding, which are currently trading at $20 per share. Last month, DA announced that it will change its capital structure by issuing 300 million in debt. The 200 million raised by this issue, plus another 200 million in cash that DA already has, will be used to repurchase existing shares of stock. Assume that capital markets are perfect. Suppose you are a shareholder in DA holding 300 shares, and you disagree with this decision to lever the firm. You can undo the effect of this decision by:
A. Selling 60 shares of stock and lending $1200
B. Borrowing $2000 and buying 100 shares of stock
C. Borrowing $1200 and buying 60 shares of stock
D. Selling 100 shares and lending $2000
The correct answer is A. Why?
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