Question

Baruk Industries has no cash and a debt obligation of $36 million that is now due. The market value of​ Baruk's assets is $ 81$81 ​million, and the firm has no other liabilities. Assume perfect capital markets. a. Suppose Baruk has 1010 million shares outstanding. What is​ Baruk's current share​ price? b. How many new shares must Baruk issue to raise the capital needed to pay its debt​ obligation? c. After repaying the​ debt, what will​ Baruk's share price​ be?

Answer 1

Answer and Explanation:

The given values are:

Debt obligation

= $36 million

Market value

= $81 ​million

Outstanding shares

= $10 million

(a)...

Net Assets of the firm will be:

=
`81 - 36`

= $
`45 \ million`

Now, the current share price will be:

=
`(45)/(10)` = $
`4.5 \ per \ share`

(b)...

Number of shares to be issued to repay debt obligation will be:

=
`(36)/(4.5)` = $
`8 \ million \ shares`

(c)...

The total number of outstanding shares will be:

=
`10+8`

= $
`18 \ million`

Now,

The Current share price will be:

=
`(Net \ assets \ of \ the \ firm)/(Total \ no \ of \ outstanding \ shares)`

=
`(81)/(18)`

= $
`4.5 \ per \ share`