Question

Baruk Industries has no cash and a debt obligation of $36 million that is now due. The market value of​ Baruk's assets is $ 81$81 ​million, and the firm has no other liabilities. Assume perfect capital markets. a. Suppose Baruk has 1010 million shares outstanding. What is​ Baruk's current share​ price? b. How many new shares must Baruk issue to raise the capital needed to pay its debt​ obligation? c. After repaying the​ debt, what will​ Baruk's share price​ be?

Answer 1

Answer and Explanation:

The given values are:

Debt obligation

= $36 million

Market value

= $81 ​million

Outstanding shares

= $10 million

(a)...

Net Assets of the firm will be:

= $81 - 36$

= $$45 \ million$

Now, the current share price will be:

= $\frac{45}{10}$ = $$4.5 \ per \ share$

(b)...

Number of shares to be issued to repay debt obligation will be:

= $\frac{36}{4.5}$ = $$8 \ million \ shares$

(c)...

The total number of outstanding shares will be:

= $10+8$

= $$18 \ million$

Now,

The Current share price will be:

= $\frac{Net \ assets \ of \ the \ firm}{Total \ no \ of \ outstanding \ shares}$

= $\frac{81}{18}$

= $$4.5 \ per \ share$