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Galt Industries has 50 million shares outstanding and a market capitalization of $1.25 billion.It also has $750 million in debt outstanding.Galt Industries has decided to delever the firm by issuing new equity and completely repaying all the outstanding debt.Assume perfect capital markets.
-The number of shares that Galt must issue is closest to:
A)15 million.
B)25 million.
C)30 million.
D)40 million.

Question

Quizplus · Accepted Answer

Market capitalization is equal to the number of shares outstanding multiplied by the stock price. Therefore, the stock price of Galt Industries is $1.25 billion divided by 50 million shares, which is $25 per share. 
To completely repay $750 million in debt, Galt Industries needs to issue new equity of $750 million. Since the stock price is $25 per share, Galt needs to issue $750 million divided by $25 per share, which is 30 million shares. Therefore, the answer is C)30 million.

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