Suppose that American Eagle Outtters, headquartered in SouthsideWorks, is financed solely by common stock. It has...

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Suppose that American Eagle Outtters, headquartered inSouthsideWorks, is financed solely by common stock. It has 170million shares outstanding at a price of $18 per share. Itannounces that it intends to issue $1 billion of debt and use theproceeds to buy back common stock. The debt beta will be zero. Therisk-free rate is 2%, the expected return on the market portfoliois 9.7%, and American Eagle Outtters's asset beta is 1.2.
(a) How is the market price of its stock affected by theannouncement?
(b) How many shares can the company buy back with the $1 billionof new debt that it issues?
(c) What is its firm value before and after the change in itscapital structure?
(d) What is American Eagle Outtters' debt ratio after the changein its capital structure?
(e) What is its cost of equity after restructuring?

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Information about the common stock No of outstanding Shares 170000000 Price of the Stock 18 Therefore Market Cap of American Eagle 17000000018 3060000000 a Initially the share price post buyback announcement might increase as the end result of a buyback would mean a higher EPS Earning Per Share for the stockholder However in the long term the See Answer

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Suppose that American Eagle Outtters, headquartered inSouthsideWorks, is financed solely by common stock. It has 170million shares outstanding at a price of $18 per share. Itannounces that it intends to issue $1 billion of debt and use theproceeds to buy back common stock. The debt beta will be zero. Therisk-free rate is 2%, the expected return on the market portfoliois 9.7%, and American Eagle Outtters's asset beta is 1.2.(a) How is the market price of its stock affected by theannouncement?(b) How many shares can the company buy back with the $1 billionof new debt that it issues?(c) What is its firm value before and after the change in itscapital structure?(d) What is American Eagle Outtters' debt ratio after the changein its capital structure?(e) What is its cost of equity after restructuring?