Problem:
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.
Required:
Question 1: How is the market price of the stock affected by the announcement?
Question 2: How many shares can the company buy back with the $160 million of new debt that it issues?
Question 3: What is the market value of the firm (equity plus debt) after the change in capital structure?
Question 4: What is the debt ratio after the change in structure?
Question 5: Who (if anyone) gains or loses?
Note: Please show guided help with steps and answer.