Finance Question The management of Mitchell labs decided to go private in 2002 b

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Finance Question The management of Mitchell labs decided to go private in 2002 by buying in all 3 million of its outstanding shares at 19.50 per share. By 2006 management had restructured the company by selling off the petroleum research division for 13 million, the fiber technology division for 9.5 million, and the synthetic products division for 21 million. Because these divisions had only been marginally profitable, Mitchell labs is a stronger company after the restructuring. Mitchell is now able to concentrate exclusively on contract research and will generate earnings per share of 1.25 this year. Investment bankers have contacted the firm and indicated that if it reentered the public market, the 3 million shares it purchased to go private could now be reissued to the public at a P/E ratio of 16 times earnings per share. What is the percentage return to the management of Mitchell labs from the restructuring? give detail with answer

Explanation / Answer

Amount spent in buying the shares= 3 * 19.5 = 58.5M

Sell price of share = 1.25 * 16 = 20

Money obtained by going public = 3 * 20 = 60M

Money obtained by selling other divisions = 13 + 9.5 + 21 = 43.5M

Hence total money gained = 60 + 43.5 - 58.5 = 45M

%age return = ( 45 * 100 / 58.5 ) = 76.92% in 4 years.

which is 19.23% annualized.

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