Company issues equity to pay up debt. What's the effect on share price?
For the sake of simplicity, let's assume that the firm will generate a FCF to Firm of 100 forever and that the discount rate is 10%.
It issues 43 new shares at a market price of 7 and immediately uses the cash to pay the debt. Debt goes to 0, which means that Enterprise Value of Equity = Market Value of Equity = 1000. Similarly, the number of shares increases, and therefore the share price does not change.
The only limitations I can think of are:
- Changing the capital structure would have an impact on the WACC, which would therefore change the Enterprise Value, which means that the stock price would actually change in the end.
- By doing so, you decrease the EPS / DPS, which means that investors would not be willing to pay as much as 7 for the stock anymore.
Could someone confirm?
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