Debtholders seeing the extra risk mark the value of the


Executive Cheese has issued debt with a market value of $100.56 million and has outstanding 15.60 million shares with a market price of $10 a share. It now announces that it intends to issue a further $55.44 million of debt and to use the proceeds to buy back common stock. Debtholders, seeing the extra risk, mark the value of the existing debt down to $60 million. Please show full working for the following questions.

a. Calculate the market price of the stock following the announcement. (Round your answer to 2 decimal places.)

Price of the stock= $ ?

b. How many shares can the company buy back with the $55.44 million of new debt that it issues? (Enter your answer in millions. Round your answer to 1 decimal place.)

Number of shares  = ? million

c. What is the market value of the firm (equity plus debt) after the change in capital structure? (Enter your answer in millions. Round your answer to 2 decimal places.)

Market value = $ ? million 

d. What is the debt ratio after the change in structure? (Round your answer to 2 decimal places.)

Debt ratio = ?

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Finance Basics: Debtholders seeing the extra risk mark the value of the
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