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Problem 17-8 MM proposition 1

Executive Cheese has issued debt with a market value of $106.11 million and has outstanding 15.90 million shares with a market price of $10 a share. It now announces that it intends to issue a further $52.89 million of debt and to use the proceeds to buy back common stock. Debtholders, seeing the extra risk, mark the value of the existing debt down to $60 million.

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  1. a-1. Calculate the market price of the stock following the announcement. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

  2. a-2. How is the market price of the stock affected by the announcement?

  3. b. How many shares can the company buy back with the $52.89 million of new debt that it issues? (Do not round intermediate calculations. Enter your answer in millions. Round your answer to 1 decimal place.)

  4. c-1. What is the market value of the firm (equity plus debt) after the change in capital structure? (Do not round intermediate calculations. Enter your answer in millions. Round your answer to 2 decimal places.)

  5. c-2. Did the market value of the firm change?

  6. d. What is the debt ratio after the change in structure? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

  7. e. Who (if anyone) gains or loses?

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