Suppose two all-equity-financed firms, ABC and XYZ, both have $100 million of equity outstanding. Each firm now issues $10 million of new stock and uses the proceeds to purchase the other’s shares.
a. What happens to the sum of the value of outstanding equity of the two firms?
b. What happens to the value of the equity in these firms held by the noncorporate sector of the economy?
c. Prepare the balance sheet for these two firms before and after the stock issues.
d. If both of these firms were in the S&P 500, what would happen to their weights in the index?