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Suppose that American Eagle Outtters, headquartered in SouthsideWorks, is financed solely by common stock. It has 170 million shares outstanding at a price of $18 per share. It announces that it intends to issue $1 billion of debt and use the proceeds to buy back common stock. The debt beta will be zero. The risk-free rate is 2%, the expected return on the market portfolio is 9.7%, and American Eagle Outtters's asset beta is 1.2.

(a) How is the market price of its stock affected by the announcement?

(b) How many shares can the company buy back with the $1 billion of new debt that it issues?

(d) What is American Eagle Outtters' debt ratio after the change in its capital structure?

(e) What is its cost of equity after restructuring?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92816849

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