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Digital Fruit is financed solely by common stock and has outstanding 25 million shares with a market price of $10

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Digital Fruit 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. There are no taxes.

a. What is the expected market price of the common stock after the announcement?

b. How many shares can the company buy back with the $160 million of new debt that it will issues?

c. What is the market value of the firm (equity plus debt) after the change in capital structure?

d. What is the debt ratio after the change in capital structure?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...

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Fundamentals of Corporate Finance

Fundamentals of Corporate Finance

ISBN: 978-1259722615

9th edition

Authors: Richard Brealey, Stewart Myers, Alan Marcus

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Question Posted: June 24, 2017 08:58:50
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A stock buyback is when a public company uses cash to buy shares of its own stock on the open market. A company may do this to return money to shareholders that it doesn\\\\\\\'t need to fund operations and other investments.This video will give you detailed overview about how stock buy back works and how it is useful tool for companies to raise capital .

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