Executive Chalk is financed solely by common stock and has outstanding 30 million shares with a market price of $20 a share. It now announces that it intends to issue $300 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?

1. Stock price remains the same. or

2. Stock price increases. or

3. Stock price decreases.

b. How many shares can the company buy back with the $300 million of new debt that it issues?(Enter your answer in millions.)

Shares repurchased million =

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

Market value $ million =

d. What is the debt ratio after the change in structure? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Debt ratio =