An all-equity business has 100 million shares outstanding, Ask an Expert

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An all-equity business has 100 million shares outstanding, selling for $20 a share. Management believes that interest rates are unreasonably low and decides to execute a dividend recapitalization. It will raise $1 billion in debt and repurchase 50 million shares.

Do equity shareholders appear to have gained or lost as a result of the recap? Please explain.

Assume now that the recap increases total firm cash flows, which adds $100 million to the value of the firm. Now what is the market value of the firm? What is the market value of equity?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92873668

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