Executive Chalk is financed solely by common stock and has outstanding 25 millio

Question

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.       a. How is the market price of the stock affected by the announcement? Please explain in detail why.
b. Who (if anyone) gains or loses? Please explain in detail why.
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.       a. How is the market price of the stock affected by the announcement? Please explain in detail why.
b. Who (if anyone) gains or loses? Please explain in detail why.

Explanation / Answer

a. The market price of the stock is not affected by the announcement

Since the market price of the shares is $10, the company can buy back:

$160 million/$10 = 16 million shares

After the change in capital structure, the market value of the firm is unchanged:

Equity + Debt = (9 million

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