ABC SA. is financed solely by equity. Currently, the company has 20 million shares outstanding. These shares are listed in Euronext at 10€/share. The executive management team announced the aim of issuing 40 million euros in debt and using the proceeds to buy own shares (a share buyback program). a) What consequences on the market price do you anticipate, because of this announcement (provide the corresponding rationale for your answer)? b) How many shares can the company buy back with the proceeds from the debt issue? c) Following the change in financial structure, what will be the company’s market value (equity plus debt)?

ABC SA. is financed solely by equity. Currently, the company has 20 million shares outstanding. These shares are listed in Euronext at 10€/share. The executive management team announced the aim of issuing 40 million euros in debt and using the proceeds to buy own shares (a share buyback program). a) What consequences on the market price do you anticipate, because of this announcement (provide the corresponding rationale for your answer)? b) How many shares can the company buy back with the proceeds from the debt issue? c) Following the change in financial structure, what will be the company’s market value (equity plus debt)?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter15: Capital Structure Decisions

Section: Chapter Questions

Problem 11P: The Rivoli Company has no debt outstanding, and its financial position is given by the following...

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