Question

Hank Fine Steakhouse has a long-term debt with a market value of $100.56 million and has outstanding 15.60 million shares with a market price of $10 a share. It now announces that it intends to issue a further $55.44 million of debt and to use the proceeds to buy back common stock. Debt Holders, seeing the extra risk, mark the value of the existing debt down to $60 million. With the new issued debt, how many shares can Hank buyback

Answer 1

New issued debt will be "$55.44 million". The further explanation is given below.

Step-by-step explanation:

As debt interest reduces equity grows:

Present equity's value will be:

=
`15.60* 10`

= $
`156`

Debt's current value will be:

=
`156+40.56`

=
`196.56`

Now,

New share price =
`196.56` =
`12.6`

Value of new issued debt will be:

= $
`55.44 \ million`

Purchased shares will be:

=
`(New \ debt \ to \ be \ issued)/(Price \ per \ share)`

=
`(55.44)/(12.6)`

= $
`4.4 \ millions`