Executive Cheese has issued debt with a market value of $106.19 million and has
ID: 2638672 • Letter: E
Question
Executive Cheese has issued debt with a market value of $106.19 million and has outstanding 14.9 million shares with a market price of $10 a share. It now announces that it intends to issue a further $53.71 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.
Calculate the market price of the stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
How many shares can the company buy back with the $53.71 million of new debt that it issues? (Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place.)
What is the market value of the firm (equity plus debt) after the change in capital structure? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
What is the debt ratio after the change in structure? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
a.
Calculate the market price of the stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Explanation / Answer
Answer:
In the books of Executive Cheese:
a). Market Price of Stock = Outstanding Shares * Market Price per Share
Here, Market Price of Stock = 14,900,000 shares * $10= $149,000,000
Price of the stock = $149,000,000
b).There are 14,900,000 shares whose value is $149,000,000.
So if the value of Debt is $53,710,000 then No. of Shares company can buy back = 53,710,000*14,900,000/149,000,000 = 5,371,000 shares
Company can buy back 5,371,000 shares.
c).Market Value of Firm ( Equity + Debt) = 149,000,000 + 53,710,000+106,190,000-60,000,000 ( Market Value of Debt + Market Value of Debt) = $248,900,000
d).Debt Ratio= Total liabilities / Total shareholders' equity = 248,900,000/149,000,000= 1.67
e).The investors in the existing debt lose while the shareholders gain as a higher leveraged firm bears higher risk to investors whereas the shareholders gain with the same.
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