Answered: What would you expect to happen to an…

What would you expect to happen to an all-equityfirm’s stock price if its management announceda recapitalization under which debt would beissued and used to repurchase common stock?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 12QTD

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Question

What would you expect to happen to an all-equity
firm’s stock price if its management announced
a recapitalization under which debt would be
issued and used to repurchase common stock?

Expert Solution

Step 1

Introduction:

Recapitalization is a form of corporate rearrangement aimed at improving the financial structure of a corporation. In order to make their financial base more stable or optimal, businesses typically conduct recapitalization. Recapitalization simply means swapping one form of finance for another – equity securities for debt, or debt for equity.

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