Question

Stock Price after Recapitalization Lee Manufacturing's value of operations is equal to $900 million after a recapitalization (The firm had no debt before the recap.) Lee raised $300 million in new debt and used this to buy back stock. Lee had no short-term investments before or after the recap. After the recap, wd = 1/3. The firm had 28 million shares before the recap. What is P (the stock price after the recap)? Do not round intermediate calculationos. Round your answer to the nearest cent.

Answer 1

Value of Equity = Value of Firm - Value of Debt

= [New Debt / wD] - Value of Debt

= [$300 million / (1/3)] - $300 million

= $900 million - $300 million = $600 million

Share price before recap = Value of Equity / No. of shares outstanding

= $900 million / 28 million = $32.14

No. of shares repurchased = Value of Debt / Share price before recap

= $300 million / $32.14 = 9.33 million

Shares outstanding after recap = Shares outstanding before recap - Shares Repurchased

= 28 million - 9.33 million = 18.67 million

Stock Price after recap. = Value of Equity / No. of Shares Outstanding After Recap.

= $600 million / 18.67 million = $32.14