BB is a major British multinational retailer with headquarters in London, England, that specialises in selling clothing, home products and food products. BBis an all-equity firm with 80 million shares outstanding, which are currently trading for £ 3.5 per share. A month ago, BB announced it will change its capital structure by borrowing £50 million in short-term debt, borrowing £50 million in long-term debt, and issuing £50 million of preferred stock. The £150 million raised by these issues, plus another £25 million in cash that BB already has, will be used to repurchase existing shares of stock. The transaction is scheduled to occur today. Assume that BB is functioning in perfect capital market. a) What is the market value balance sheet for BB in following three situations. i. Before this transaction. ii. After the new security issued but before the share repurchases iii. After the share repurchases b) How many shares outstanding will BB have after the share repurchase, and what will the value of those shares be? c) Explain what Modigliani and miller proposition one and two says [3 marks]
