Question

 Zetatron is an all-equity firm with 100 million shares outstanding, which are currently trading for $7.50 per share. A month ago, Zetatron announced it will change its capital structure by borrowing $100 million in short-term debt, borrowing $100 million in long-term debt, and issuing $100 million of preferred stock. The $300 million raised by these issues, plus another $50 million in cash that Zetatron already has, will be used to repurchase existing shares of stock. The transaction is scheduled to occur today. Assume perfect capital markets.

What is the market value balance sheet for Zetatron

i. Before this transaction?

ii. After the new securities are issued but before the share repurchase?

iii. After the share repurchase?

At the conclusion of this transaction, how many shares outstanding will Zetatron have, and what will the value of those shares be?

Initial Stock Price	7.50
Initial Shares Outstanding	100.00

Market Value Balance Sheet After Each Stage of Zetatron's Leveraged Recapitalization ($ millions)

Initial
Assets					Liabilities
Cash	350 million						100 million
							100 million
							100 million
Existing Assets	700 million				Common Stock		750 million
Total Assets	1,050 million				Total Liabilities & Equity		750 million
Shares outstanding (millions)
Value per share
After Funding is Received
Assets						Liabilities
Cash						Short term debt
						Long term debt
						Preferred stock
Existing Assets						Common stock
Total Assets						Total Liabilities & Equity
Shares outstanding (millions)
Value per share
After Share Repurchase
Assets			Liabilities
Cash			Short term debt
			Long term debt
			Preferred stock
Existing Assets			Common stock
Total Assets			Total Liabilities & Equity
Shares outstanding (millions)
Value per share

Answer 1