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Problem:

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.

Required:

Question 1: How is the market price of the stock affected by the announcement?

Question 2: How many shares can the company buy back with the $160 million of new debt that it issues?

Question 3: What is the market value of the firm (equity plus debt) after the change in capital structure?

Question 4: What is the debt ratio after the change in structure?

Question 5: Who (if anyone) gains or loses?

Note: Please show guided help with steps and answer.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91169245

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