Here is a solution.
(a) Debt = $100MM, stock = $10 * 15MM = $150MM, market value of the firm =
100 + 150 = $250MM.
Just before the sale of new debt (after the announcement of the
issurance), the values change to
Debt = $70MM, stock = 250 - 70 = $180MM, market value of the firm =
$250MM (unchanged).
New stock value per share = 180/15 = $12.
(b) Issurance of new debt will raise $60MM ($50MM in the book should be a
typo).
Number of shares bought back = 60/12 = 5MM.
(c) By MM's Proposition I, market value of the firm does not change, so =
$250MM.
(d) After issurance of new debt, total debt = 70 + 60 = $130MM. So debt
ratio = 130/250 = 0.52.
(e) Old debtholder's value decreases by (100 - 70)/100 = 30%, while
stockholder's value per share increases by
(12 - 10)/10 = 20%.
Sharon Cowles <weditt@mon-cre.net> on 08/29/98 05:58:03 PM
To: studygroup5B@lists.casact.org
cc:
Subject: Chapter 17, Quiz problem #11
I am having brain fade on this problem (in the text book). Does anyone
have the solution worked out?