Question
F had $2,000,000 of debt in its capital structure and 500,000 shares of common stock outstanding. The CFO hired a consultant who said the company
F had $2,000,000 of debt in its capital structure and 500,000 shares of common stock outstanding. The CFO hired a consultant who said the company could reduce its WACC by adding more debt to its capital structure. Therefore, F decided to do a recap. It issued $5,000,000 of new debt (for a total of $7,000,000) which will be used to repurchase the firms stock. The firms market value balance sheet after the debt issuance, but before the share repurchase is below:
| Assets | Capital | ||
| Value of Business | $18,000,000 | Debt | $7,000,000 |
| Cash (to repurchase shares) | $5,000,000 | Equity | $16,000,000 |
What is the value of stock before the repurchase? show work How many shares will be repurchased? How many shares will remain outstanding after the repurchase? show work
After, the share repurchase, F has the following market value balance sheet. What is the value of the stock after the repurchase?show work
| Assets | Capital | ||
| Value of Business | $18,000,000 | Debt | $7,000,000 |
| Cash (to repurchase shares) | $0 | Equity | $16,000,000 |
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Financial Markets And Institutions
Authors: Jeff Madura
5th Edition
0324027443, 9780324027440
