Executive Chalk is financed solely by common stock and has outstanding 25 million shares with a market price of $10 a share. It now announces that it intends to issue $160 million of debt and to use the proceeds to buy back common stock. How is the market price of the stock affected by the announcement?

Fin 600 homework question | Business & Finance homework help

The expected market reaction to Executive Chalk’s announcement of a debt issuance to buy back common stock will depend on the perceived value of the company and its investment potential. Investors might view it as an indication of financial stability because debt provides more predictable returns than equity financing. This could lead to an increase in demand for the company’s shares and thus cause the market price of its stock to rise.

It is possible, however that investors might perceive Executive Chalk’s move as an indication that Executive Chalk could not be financially stable and therefore want to avoid additional risk in uncertain times. If too many investors feel this way then there could be a decrease in demand for the company’s stock, leading prices to drop instead.

Importantly, companies that borrow large amounts of money will often have to pay interest and dividends. If they cannot use the funds elsewhere to make higher revenue or reduce costs, this can lead to a reduction in their profit margins. As such, if Executive Chalk’s buyback fails to create enough value over time then shareholders may decide sell off their stocks at lower prices – resulting in an overall decline in market value even if short-term gains have been made initially due to investor speculation.

In conclusion then, while it is difficult predict precisely how much impact Executive Chalk’s decision will have on its share price without further information about its strategy and management plans going forward – any changes will likely be influenced by both investor confidence as well as longer-term financial performance considerations.

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