An all-equity business has 200 million shares outstanding selling for $30 a share. Management believes that...

An all-equity business has 200 million shares outstanding selling for $30 a share. Management believes that interest rates are unreasonably low and decides to execute a leveraged recapitalization (a recap). It will raise $750 million in debt and repurchase 25 million shares.

a. What is the market value of the firm prior to the recap? What is the market value of equity?

b. Assuming the irrelevance proposition holds, what is the market value of the firm after the recap? What is the market value of equity?

c. Do equity shareholders appear to have gained or lost as a result of the recap? Please explain.

Solutions

Expert Solution

Answer :-

a. What is the market value of the firm prior to the recap? What is the market value of equity?

Given data ,

Equity business = 200 million shares

Outstanding selling price = $30 a share

Market value = Equity business * Outstanding selling price

= 200 million shares * $30 a share

= $6,000 millions

= $6 billions

Market value = $6 billions

Market value of equity is also same .

Market value of equity = $6 billions

b. Assuming the irrelevance proposition holds, what is the market value of the firm after the recap? What is the market value of equity?

Market esteem would stay same after recap. Just market capitalization would diminish to half .

Market value of equity = $6 billions / 2

= $3 billions

Market value of equity = $3 billions

c. Do equity shareholders appear to have gained or lost as a result of the recap? Please explain.

Repurchasing shares builds stock value indicating certainty of the organization in its working.
Hence,investors gets capital increases .

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

An all-equity business has 100 million shares outstanding, selling for $20 a share. Management believes that...

An all-equity business has 100 million shares outstanding, selling for $20 a share. Management believes that interest rates are unreasonably low and decides to execute a dividend recapitalization. It will raise $1 billion in debt and repurchase 50 million shares. Do equity shareholders appear to have gained or lost as a result of the recap? Please explain. Assume now that the recap increases total firm cash flows, which adds $100 million to the value of the firm. Now what is...

Q1. An all-equity financed firm has 1 million shares outstanding, currently selling at $10 per share....

Q1. An all-equity financed firm has 1 million shares outstanding, currently selling at $10 per share. It considers a restructuring that would issue $4 million in debt to repurchase 400,000 shares. How does this affect overall firm value? Q2: What is the expected return on equity for a firm with a 14% expected return on assets that pays 9% on its debt, which totals 30% of assets? Q3: What is the expected rate of return to shareholders if the firm...

MBM Industries is an all-equity firm with 50 million shares outstanding. MBM has £200 million in...

MBM Industries is an all-equity firm with 50 million shares outstanding. MBM has £200 million in cash and expects future free cash flows of £75 million per year. Management plans to use the cash to expand the firm's operations, which in turn will increase future free cash flows by 12%. MBM's cost of capital is 10%; assume that capital markets are perfect. i. What is the value of MBM if it uses the £200 million to expand? ii. What is...

a. An all-equity company ABC has nine million outstanding shares, with a share price currently at...

a. An all-equity company ABC has nine million outstanding shares, with a share price currently at £55. The company also has outstanding debt valued at £75 million. Equity cost of capital is 6.5%. The company has made an announcement of issuing new debt valued at £210 million. The proceeds of this issue will be used to repay outstanding debt and to pay out an immediate dividend. Assume capital markets are perfect. Required: i. What is the share price just after...

Ashman Motors is currently an all-equity firm. It has two million shares outstanding, selling for $37...

Ashman Motors is currently an all-equity firm. It has two million shares outstanding, selling for $37 per share. The company has a beta of 0.9, with the current risk-free rate at 3.1% and the market premium at 7.6%. The tax rate is 25% for the company. Ashman has decided to sell $37 million of bonds and retire half its stock. The bonds will have a yield to maturity of 7.4%. The beta of the company will rise to 1.3 with...

Inc has 200 million of shares outstanding trading at $10/share. The company has a beta of...

Inc has 200 million of shares outstanding trading at $10/share. The company has a beta of 1.2 and expected market return is 7%. T bill rate is 1.5%. the company has $25 million in interest expenses and a book value of debit of 125 million. The debt will mature in 12 years and it has a BB rating. The spread for a BB rating is 2.5 and the long term T bonds yield 4%. The company has an effective tax...

Shares in Growth Corporation are selling for $50 per share. There are 1 million shares outstanding....

Shares in Growth Corporation are selling for $50 per share. There are 1 million shares outstanding. The stock pays a 35 percent stock dividend. After the dividend: How many shares will be outstanding? What will be the price per share? Please state your answer in millions and to 2 decimal places. Outstanding shares = million Price per share =

Shares in Growth Corporation are selling for $75 per share. There are 11 million shares outstanding....

Shares in Growth Corporation are selling for $75 per share. There are 11 million shares outstanding. The stock pays a 25 percent stock dividend. After the dividend: How many shares will be outstanding? What will be the price per share? Please state your answer in millions and to 2 decimal places. Outstanding shares = million Price per share =

TAFKAP Industries has 2 million shares of stock outstanding selling at $16 per share, and an...

TAFKAP Industries has 2 million shares of stock outstanding selling at $16 per share, and an issue of $12 million in 8.0 percent annual coupon bonds with a maturity of 15 years, selling at 105 percent of par. Assume TAFKAP’s weighted average tax rate is 21 percent, it can make full use of the interest tax shield, and its cost of equity is 14.0 percent. What is TAFKAP’s WACC? (Do not round intermediate calculations. Round your final answer to 2...

AFKAP Industries has 2 million shares of stock outstanding selling at $13 per share, and an...

AFKAP Industries has 2 million shares of stock outstanding selling at $13 per share, and an issue of $12 million in 8.5 percent annual coupon bonds with a maturity of 20 years, selling at 107 percent of par. Assume TAFKAP’s weighted average tax rate is 34 percent and its cost of equity is 13.0 percent. What is TAFKAP’s WACC?

Subjects