The CEO of JJJ, Inc., owns 27 percent of his currently all-equity-financed firm

Question

The CEO of JJJ, Inc., owns 27 percent of his currently all-equity-financed firm worth $100 million. He has proposed splitting off one of the divisions (worth $25 million) of his company to let it operate as an independent firm. Existing shareholders will not get shares in the new firm; instead, the new firm is expected to raise $25 million through an IPO, the proceeds from which are to be used to repurchase shares in JJJ. Assuming that the CEO does not participate in the stock buyback, what will his percentage ownership be after the division is split off? Please help!! Here is the ebook link: http://connect.mcgraw-hill.com/sites/0077323483/student_view0/ebook/chapter14/chend2/integrated_minicase__change_in_equity_ownership.htm I don't know where to even start with this. Please and thank you so much!

Explanation / Answer

His percentage ownership after the division is split off :

$27 million+27%($25 million)/100 million    *100

=33.75%

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