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.

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:

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