Question
River Cruises is allequityfinanced with 50,000 shares. It now proposes to issue $250,000 of bonds and use the proceeds to repurchase 25,000 shares. Suppose an
River Cruises is allequityfinanced with 50,000 shares. It now proposes to issue $250,000 of bonds and use the proceeds to repurchase 25,000 shares. Suppose an investor currently holds 500 shares in the company but is unhappy with its decision to borrow $250,000. Which of the following modifications to her own investment portfolio would offset the effects of the firm's additional borrowing? Explain
a. Borrow $250 on her own account and use the cash to buy additional River Cruises' shares.
b. Raise $250 by selling River Cruises' shares and use the cash to buy the company's debt.
c. Keep her current holding of River Cruises' shares and borrow $250 to invest in the company's bond issue.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started