Answer-first summary for fast verification
Answer: 35%.
## Explanation **Step 1: Calculate pre-acquisition values** **Company A:** - Equity value = 500 million shares × $100 = $50 billion - Debt = $22 billion - Total capital = $50B + $22B = $72 billion **Company B:** - Equity value = 125 million shares × $45 = $5.625 billion - Debt = $4 billion **Step 2: Calculate acquisition financing** **Purchase price for Company B:** - Equity value = $5.625 billion - Plus: Assumption of Company B's debt = $4 billion - Total purchase price = $9.625 billion **Financing mix:** - New equity issued: 50 million shares × $100 = $5 billion - New debt raised: $7 billion - Cash on hand: $9.625B - $5B - $7B = -$2.375 billion (this means they are actually using less cash than planned) **Step 3: Calculate post-acquisition capital structure** **New debt:** - Company A original debt: $22 billion - New debt raised: $7 billion - **Total debt** = $22B + $7B = $29 billion **New equity:** - Company A original equity: $50 billion - New equity issued: $5 billion - **Total equity** = $50B + $5B = $55 billion **Step 4: Calculate debt weight** \[ \text{Debt weight} = \frac{\text{Total debt}}{\text{Total debt} + \text{Total equity}} = \frac{29}{29 + 55} = \frac{29}{84} = 34.52\% \] This is closest to **35%**. **Answer: B**
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An analyst gathers the following information about two companies:
| Company A | Company B | |
|---|---|---|
| Outstanding debt | $22 billion | $4 billion |
| Number of shares outstanding | 500 million | 125 million |
| Share price | $100 | $45 |
Company A recently announced its intent to acquire Company B. To fund the acquisition, Company A will issue 50 million new shares, raise $7 billion in new debt, and fund the remainder with cash on hand. Company A will also repay Company B's outstanding debt using proceeds from the debt issuance. The book value of Company A's debt is equal to its market value. If the share prices remain unchanged following the acquisition, the weight of debt in Company A's capital structure as a result of the acquisition of Company B is closest to:
A
32%.
B
35%.
C
38%.