Question

D'Anconia Copper is an all-equity firm with 60 million shares outstanding, which are currently trading at $20 per share. Last month, d'Anconia announced that it will change its capital structure by issuing $300 million in debt. The $200 million raised by this issue, plus another $200 million in cash that d'Anconia already has, will be used to repurchase existing shares of stock. Assume that capital markets are perfect.

1. At the conclusion of this transaction, what will be the value of a share of Anconia Copper will be closest to:

a. $18.33
b. $20.00
c. $25.00
d. $27.50

2. Suppose you are a shareholder in d'Anconia Copper holding 300 shares, and you disagree with the decision to lever the firm. You can undo the effect of this decision by:

a. borrowing $2,000 and buying 100 shares of stock.
b. selling 100 shares of stock and lending $2,000.
c. borrowing $1,200 and buying 60 shares of stock.
d. selling 60 shares of stock and lending $1,200

Answer 1

20m

Step-by-step explanation:

To calculate the number of outstanding shares we need to calculate market capitalization value first. After calculating market capitalization value we are going to divide the difference in market capitalization value by share price.

DATA

share price = $20

Debt involved = 200m

Cash = 200m

Solution

Number of outstanding shares (after the transaction of shares repurchase) = Difference in market capitalization / Per share price.

Number of outstanding shares = (1200m - 800m) / 20

Number of outstanding shares = 400m / 20

Number of outstanding shares = 20m

Working

Market capitalization (after the repurchase of existing shares) = Shareholders' funds - Debt involved - Cash.

Market capitalization = (60m * 20) - 200m- 200m.

Market capitalization = 1200m - 200m - 200m

Market capitalization = $800m.