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Assume perfect markets and no taxes. A firm received an unexpected flow of $ 20,000,000. The...

Assume perfect markets and no taxes. A firm received an unexpected flow of $ 20,000,000. The CEO is considering two possible uses for this money: dividend payments (for 10,000,000 shares outstanding) or debt payment. The stock price of this company before the unexpected cash flow was $10/share. If the CEO decides to pay the debt, the new share price (after debt payment) will be:

a.)9

b.) 10

c.) 11

d.) 12

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Answer #1

payment of debt would not influence the price of the share because debt would be paid through cash and not equity fund and thus the price of share will remain the same.

i,e $10/ share

so the answer is B.

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