Selected financial information for the Baltimore & Ohio Railroad Corporation (B&O)is provided in the table below.B&O is currently all equity financed,but it is considering a leveraged capital structure,details of which are presented in the column labeled 'Proposed'.Under the proposed capital structure,B&O will use all of the new debt to repurchase (and cancel)shares.How many shares will be left outstanding after the repurchase,if B&O buys shares for $30.00 per share?

A) 50,000
B) 100,000
C) 75,000
D) 25,000
E) 33,000

Question

Selected financial information for the Baltimore & Ohio Railroad Corporation (B&O) is provided in the table below.B&O is currently all equity financed,but it is considering a leveraged capital structure,details of which are presented in the column labeled 'Proposed'.Under the proposed capital structure,B&O will use all of the new debt to repurchase (and cancel) shares.How many shares will be left outstanding after the repurchase,if B&O buys shares for $30.00 per share?

A) 50,000 
B) 100,000 
C) 75,000 
D) 25,000 
E) 33,000

Quizplus · Accepted Answer

The value of debt under the levered capital structure is D = $1,500,000
With a stock price of $30.00, DRC will buy:
Number of repurchased shares = 1,500,000 / $30.00 = 50,000
Number of shares outstanding after = 100,000 - 50,000 = 50,000

Selected Financial Information for the Baltimore & Ohio Railroad Corporation