Question

Schwartz Industry is an industrial company with

103.1

million shares outstanding and a market capitalization​ (equity value) of

$3.06

billion. It has

​$1.96

billion of debt outstanding. Management have decided to delever the firm by issuing new equity to repay all outstanding debt.

a. How many new shares must the firm​ issue?

b. Suppose you are a shareholder holding 100​ shares, and you disagree with this decision. Assuming a perfect capital​ market, describe what you can do to undo the effect of this decision.

（answer B)

Answer 1

Solution:-

Market price of the share = Total equity value / No. of shares outstanding

= $3,060,000,000 / $103,100,000

= $29.67

a) To repay $1.96billion debt no. of shares to be issued would be

= $1,960,000,000 / $29.67

= $66.06 million shares

b) To undo the effect of this we need to buy more shares for the organisation and in the same proportion they are issued

No. of new shares to be bought = (66.06/103.1) * 100

= 0.6407 * 100

= 64.07

Hence approx 64 shares bought with the value of (64.07 * $29.67) = $1,900.95