Tetatron is an all-equity firm with 100 million shares outstanding, which are currently trading for $7

Finance Oct 23, 2020

Tetatron is an all-equity firm with 100 million shares outstanding, which are currently trading for $7.50 per share. A month ago, Tetatron announced it will change its capital structure by borrowing $100 million in short-term debt, borrowing $100 million in long-term debt, and issuing $100 million of preferred stock. The $300 million raised by these issues, plus another $50 million in cash that Tetatron already has, will be used to repurchase existing shares of stock. The transaction is scheduled to occur today. Assume perfect capital markets.

Required:

a) What is the market value balance sheet for Tetatron

i. Before this transaction.

ii. After the new securities are issued but before the share repurchase.

iii. After the share repurchase.

b) At the conclusion of this transaction, how many shares outstanding will Tetatron have, and what will the value of those shares be?

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