Schwartz Industry is an industrial company with 100 million shares outstanding and a market

QUESTION

Schwartz Industry is an industrial company with 100 million shares outstanding and a market capitalization (equity value) of $4 billion. It has $2 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. Assum- ing a perfect capital market, describe what you can do to undo the effect of this decision.
(ANSWER) (a.) Share price = Equity Value/ Shares Outstanding = 4b/100m = $40, Issue = Debt Outstanding/ Shares Price = 2b/40 = 50 million shares (b.) You can undo the effect of the decision by borrowing to buy additional

s, in the same proportion as the firms actions, thus relevering your own portfolio. In this case you should buy 50 new shares and borrow $2000.

ANSWER:

CLICK REQUEST FOR  AN EXPERT SOLUTION