Question

Executive Chalk is financed solely by common stock and has 25 million shares outstanding with a market price of $10 a share. It announces that it intends to issue $160 million of debt and use the proceeds to buy back common stock. Assume that the MM assumptions hold (i.e., no taxes, no costs of financial distress). a) What is the value of the firm before and after the proposed capital structure change

Answer 1

Answer: See explanation

Explanation:

First we will have to calculate the value of the firm before the debt issue. This will be:

= 25,000,000 × $10

= $250,000,000

We also calculate the value of the firm after after the proposed capital structure change. The value of equity will be:

= $250,000,000 - $160,000,000

= $90,000,000

Therefore, the value of debt will also be $160,000,000.