Use the following information to answer the question(s)below.
d'Anconia Copper is an all-equity firm with 60 million shares outstanding,which are currently trading at $20 per share.Last month,d'Anconia announced that it will change its capital structure by issuing $300 million in debt.The $200 million raised by this issue,plus another $200 million in cash that d'Anconia already has,will be used to repurchase existing shares of stock.Assume that capital markets are perfect.
-The market capitalization of d'Anconia Copper after this transaction takes place is closest to:
A)$800 million.
B)$900 million.
C)$1100 million.
D)$1200 million.

Question

Quizplus · Accepted Answer

The market capitalization of d'Anconia Copper after this transaction takes place is $900 million. This is because the company will have 60 million shares outstanding after the repurchase, and each share will be worth $15 ($20 - $5). Therefore, the market capitalization will be 60 million * $15 = $900 million.

Use the Following Information to Answer the Question(s)below