Problem:
Executive Chalk is financed solely by common stock and has 25 million shares outstanding with a market price of $10 a share. It announces that it intends to issue $160 million of debt and use the proceeds to buy back common stock. Assume that the MM assumptions hold (i.e., no taxes, no costs of financial distress).
Requirement:
Question 1: What is the value of the firm before and after the proposed capital structure change?
Question 2: What is the debt-to-equity ratio after the capital structure change?
Question 3: What is the stock price after the capital structure change?
Question 4: Who (if anyone) gains or loses?
Note: Show supporting computations in good form.