Reference no: EM133058453
Suppose we live in a world in which Modgliani Miller is true, that is there are no information or tax issues and capital structure is irrelevant.
A firm currently has 1,000,000 shares outstanding, each with a price of $89.
The firm is planning a sale of debt of face value $10,000,000. It's investment bankers calculate that the debt will sell for $9,100,000 in the market (lower than full face value as it's coupon rate will be lower than its rate of discount).
The firm will use the proceeds from the sale of debt to repurchase equity. What will be the price per equity after the debt has been sold and shares repurchased?
Assume all shareholders act rationally in making their purchase decision, that is they purchase the Rights stock if the price they will pay will be lower than the price of the stock after the Rights issue is completed.
What will the price of the stock be after the Rights issue is completed?
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