Executive Cheese has issued debt with a market value of $100 million and has 15 million shares outstanding, with a market price of $10 a share. The company now announces that it intends to issue a further $60 million of debt and to use the proceeds to buy back common stock. Debtholders, realising the extra risk adding debt will create, cause the value of the existing debt to fall to $70 million. Assume that there are no taxes and no costs of financial distress.

1. Calculate the market price per share of the stock following the announcement.

(4 marks)

2. How many shares can the company buy back with the $60 million raised from the new debt issue?

(4 marks)

3. What is the market value of the firm (equity plus debt) after the shares have been repurchased?

(4 marks)

4. What is the debt ratio after the shares have been repurchased?

(4 marks)

5. Who (if anyone) gains or loses from the change in capital structure?