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?
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?
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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