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Executive Cheese has issued debt with a market value of $114.91 million and has outstanding 14.30...

Executive Cheese has issued debt with a market value of $114.91 million and has outstanding 14.30 million shares with a market price of $10 a share. It now announces that it intends to issue a further $64.39 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 $62 million.

a. Calculate the market price of the stock following the announcement. (Round your answer to 2 decimal places.)

Price of the stock            $

b. How many shares can the company buy back with the $64.39 million of new debt that it issues? (Enter your answer in millions. Round your answer to 1 decimal place.)

Number of shares             million

c. What is the market value of the firm (equity plus debt) after the change in capital structure? (Enter your answer in millions. Round your answer to 2 decimal places.)

Market value            $ million

d. What is the debt ratio after the change in structure? (Round your answer to 2 decimal places.)

Debt ratio            

e. Who (if anyone) gains or loses?

The investors in the existing debt lose while the shareholders gain.
The investors in the existing debt gain while the shareholders lose.
No one gains or loses.

Solutions

Expert Solution

a. Current Market Value of Company = Equity + Debt

Current Market Value of Company = 14.30 Million * 10 + 114.91 Million

Current Market Value of Company = 143 Million + 114.91 Million

Current Market Value of Company = $257.91 Million

Value of Equity after bringing down debt = $257.91 Million - $62 Million

Value of Equity after bringing down debt = $195.91 Million

market price of the stock following the announcement = Value of Equity / 14.30 Million Shares

market price of the stock following the announcement = $195.91 / 14.30 Million Shares

Market price of the stock following the announcement = $13.70 Per Share

b. Shares can be Buy Back by the company

Shares can be Buy Back by the company = Debt Issue / Market Price

Shares can be Buy Back by the company = $64.39 Million / 13.70

Shares can be Buy Back by the company = 4700000 Shares

c. Market Value = Debt + Equity

Market Value = $62 Million + $64.39 Million + $13.70 * 9.6 Million

Market Value = $62 Million + $64.39 Million + $131.52 Million

Market Value = $257.91 Million

d. Debt Ratio = Value of Debt / Value of Equity

Debt Ratio = $62 + 64.39 Million / 131.52 Million

Debt Ratio = 0.96

e.

The investors in the existing debt lose while the shareholders gain.

Cause the current debt holders value will be reduced from $114.91 Million to 62 Million and share holders will captures the loss of debt holders.

jeff jeffy answered 1 year ago
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