MM proposition $1$ Executive Chalk is financed solely by common stock and has outstanding $25$ million shares with a market price of $$10$ a share. It now announces that it intends to issue $$160$ 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?

b$.$ How many shares can the company buy back with the $$160$ 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?

e$.$ Who $($if anyone$)$ gains or loses?

Now try the next question.