Premier Inc exists in a MM world with perfect capital markets. Premier has no debt and has 6,000 shares outstanding worth $8 each. Premier decides to issue $10,000 in perpetual debt and use the entire proceeds to repurchase shares.

After the recapitalization, the number of Premier shares outstanding (with one decimal) will be:

Question

Premier Inc exists in a MM world with perfect capital markets. Premier has no debt and has 6,000 shares outstanding worth $8 each. Premier decides to issue $10,000 in perpetual debt and use the entire proceeds to repurchase shares.

After the recapitalization, the number of Premier shares outstanding (with one decimal) will be:

BlackTom AI · Accepted Answer

We start by stating the core setup: Premier Inc has no debt initially, with 6,000 shares outstanding at $8 each. The market is perfect (MM world), so the total firm value is V0 = 6,000 × $8 = $48,000.

The firm then issues $10,000 of perpetual debt and uses all the proceeds to repurchase shares. In an MM world with no taxes and no bankruptcy costs, the total value of the firm remains unchanged at $48,000 after recapitalization.

Because debt increases to $10,000, the market value of equity must fall by the amount of debt issued to keep the total value constant: Equity value after recap = V0 − Debt = $48,000 − $10,000 = $38,000.

If the stock price remains at $8 per share in this perfect-market world (price is not affected by the capital structure in MM with no taxes), then the number of outstanding shares after the repurchase is: Shares_outstanding = Equity_value / Price_per_share = $38,000 / $8 = 4,750 shares.

Therefore, the number of Premier shares outstanding after the recapitalization, to one decimal place, is 4750.0.

Note on missing options: This question provides only the numerical answer and no multiple-choice options. With the standard MM assumptions (no taxes, perfect markets, no transaction costs), the logic above leads to 4,750 shares outstanding after the recapitalization. If you consider other scenarios (e.g., taxes or different share prices), the result could differ, but under the given MM framework, 4,750.0 is the consistent outcome.

COMM_V 370 101-108 2025W1 COMM 370 2025W1 - Practice Final

查看解析

登录即可查看完整答案

类似问题

Which of the following statements best reflects the key insight of the M&M Proposition (without taxes)?

In a world with perfect capital markets, a firm that issues a large amount debt to finance a share repurchase will ultimately boost its EPS and reduce its post-transaction market capitalization, but will not affect its stock price.

In a world with corporate taxes (only capital markets imperfection), a levered firm will issue equity to repay some of its debt. Indicate which of the following statements is correct:

更多留学生实用工具

考试浏览器助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单