ECO 606 Problem Set #10 Due by 11/13 2020 The objective of this problem set is to practice the concepts learned about capital structure Please use Excel to solve these questions and upload your answers to Canvas. 1. Executive Energy is financed solely by common stock and has outstanding 50 million shares with a market price of $20 a share. It now announces that it intends to issue $200 million of debt and to use the proceeds to buy back common stock. Ignore taxes. a. How is the market price of the stock affected by the announcement? b. How many shares can the company buy back with the S200 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? c. Who (if anyone) gains or loses? 2. Power Corp, has issued debt with a market value of $100 million and has outstanding 15 million shares with a market price of S10 a share. It now announces that it intends to issue a further $60 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 $70 million. Ignore taxes. a. How is the market price of the stock affected by the announcement? b. How many shares can the company buy back with the S60 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? c. Who (if anyone) gains or loses? 3. Oil Inc. is financed by a mixture of debt and equity. You have the following information about its cost of capital. Can you fill the blanks? Ignore taxes. To 12% Be-1.5 Bo BA- DYE+D)=0.5 18% 10% Corporate Finance for the Energy Sector Page 1