Debt Irrelevance. River Cruises (see Section 16.1) is all-equity-financed with 100,000 shares. It now proposes to issue $250,000 of bonds and use the proceeds to repurchase 25,000 shares. Suppose an investor currently holds 1,000 shares in the company but is unhappy with its decision to borrow $250,000. Which of the f
Debt Irrelevance. River Cruises (see Section 16.1) is all-equity-financed with 100,000 shares.
It now proposes to issue $250,000 of bonds and use the proceeds to repurchase 25,000 shares.
Suppose an investor currently holds 1,000 shares in the company but is unhappy with its
decision to borrow $250,000. Which of the following modifications to her own investment
portfolio would offset the effects of the firm’s additional borrowing? (LO16-1)
a. Borrow $250 on her own account and use the cash to buy additional River Cruises’ shares.
b. Raise $250 by selling River Cruises’ shares and use the cash to buy the company’s debt.
c. Keep her current holding of River Cruises’ shares and borrow $250 to invest in the company’s
bond issue.
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