Suppose two all- equity- financed firms, ABC and XYZ, both have $ 100 million of equity out-standing.

Question:

Suppose two all- equity- financed firms, ABC and XYZ, both have $ 100 million of equity out-standing. Each firm now issues $ 10 million of new stock and uses the proceeds to purchase the other’s shares.

a. What happens to the sum of the value of outstanding equity of the two firms?

b. What happens to the value of the equity in these firms held by the non-corporate sector of the economy?

c. Prepare the balance sheet for these two firms before and after the stock issues.

d. If both of these firms were in an index, what would happen to their weights in the index?

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...