Question

Firms use recapitalization for different reasons. Recapitalization is the process through which firms make desired changes in their capital structure by using debt to repurchase equity. Firms may decide to recapitalize for various reasons, such as to maintain an optimal capital structure, to use as a defense mechanism against a hostile takeover, to minimize taxes, or to use in an exit strategy for venture capitalists. As an analyst, you are tracking the financial performance of St. Margaret's Beer Co. (SMB) The company has been 100% equity owned but recently made changes to its capital structure. You have collected the following information about the recapitalization: • SMB issued $18,000,000 in new debt to buy back stock. . The firm had no short-term investments before or after the recapitalization, • SMB had 2,250,000 shares outstanding before the recapitalization. • SMB's capital structure now has 20% debt. • The company's operations are valued at $90 million after recapitalization. Based on the information available, solve for the values in the following table. Click on the dropdown menus and then select the best answer. Assume that you are in a Modigliani and Miller (M&M) world with no taxes. Value Stock price before the repurchase Number of shares repurchased Value of equity post repurchase Based on your analysis, you prepared a report with several inferences. While proofreading, you come across the following inference. Consider this case: Recapitalization might increase the EPS, but the price per share remains the same Is the statement true or false? True O False

Answer 1

Answers stock price before the repurchase = $90,000,000 $ 2,250,000 shares = $40 Number of shares repearchased = _ $18,000,000 $40 por share = 450,000 value of Equity post repurchases = $90,000,000 X 80% = $72,000,000 value & no 450,000 Stock price before the purchase Number of dancs xepcuchased [value of Equity post repurchase 2. Is the statement true false? $72,000,000