Questions: Schwartr Industry is an industrial company with 93.4 million shares outstanding and a market capitalization (equity value) of 4.27 billion. It has 1.17 billion of debt outstanding. Management has decided to delever the firm by issuing new equity to repay all outstanding debt. a. How many new shares must the firm issue? b. Suppose you are a shareholder holding 100 shares, and you disagree with this decision. Assuming a perfect capital market, describe what you can do to undo the effect of this decision. The firm must issue million shares. (Round to one decimal place.)

Solution Steps

To determine how many new shares Schwartr Industry must issue to repay all outstanding debt, we need to calculate the total amount of new equity required and then divide it by the current share price. The share price can be found by dividing the market capitalization by the number of shares outstanding.

1. Calculate the current share price by dividing the market capitalization by the number of shares outstanding.
2. Determine the number of new shares to be issued by dividing the total debt by the current share price.

The current share price \( P \) can be calculated using the formula:

\[ P = \frac{\text{Market Capitalization}}{\text{Shares Outstanding}} = \frac{4.27 \text{ billion}}{93.4 \text{ million}} = 0.0457 \text{ billion per million shares} = 0.0457 \text{ dollars per share} \]

To determine the number of new shares \( N \) that must be issued to repay the outstanding debt, we use the formula:

\[ N = \frac{\text{Debt Outstanding}}{P} = \frac{1.17 \text{ billion}}{0.0457 \text{ dollars per share}} \approx 25.5920 \text{ million shares} \]

Rounding this to one decimal place gives:

\[ N \approx 25.6 \text{ million shares} \]

Final Answer