10. Recapitalization Aa Aa Firms use recapitalization for different reasons. Rec
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10. Recapitalization Aa Aa 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 Roxxon Inc. The company has been 100% equity owned but recently made changes to its capital structure. You have collected the foilowing information about the recapltalization Roxxon issued $21,000,000 in new debt to buy back stock . The firm had no short-term investments before or after the recapitalization. . Roxxon had 1,500,000 shares outstanding before the recapitalization. Roxxon's capital structure now has 35% debt. The company's operations are valued at $60 million after recapitalization. Based on the information available, solve for the values in the following table. Cick on the dropdown menus then select the best answer. Assume that you are in a the following table. Click on the dropdown menus and Modigliani and Miller (MaM) world with no taxes Value Stock price before the repurchase Number of shares repurchased Value of equity post repurchase Based on your analysis, you prepared a report with several inferences. While proofreading, you come across the following inference.Explanation / Answer
1)Value of equity = (value of oeprations -value of debt)
=60,000,000 -21,000,000
= 39,000,000
so share price before repurchase = (value of equity /number of shares outstanding)
=39,000,000 / 1,500,000
=$ 26 per share
2)Number of shares repurchased = debt issued /current price
=21,000,000 / 26
= 807,692 shares approx
3)value of equity after repurchase = (shares outstanding before repurchase -shares repurchased) *price
=(1,500,000 - 807,692) * 26
= 692,308 *26
= $ 18,000000 apporx
4)The statement is true .share repurchase increase the EPS as number of shares outstanding gets decreased but price per share remain the same.
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