Stock price before purchase: A. $40 per share B. $44 per share C. $140 per share

Question

Stock price before purchase:

A. $40 per share

B. $44 per share

C. $140 per share

D. $52 per share

Number of shares repurchased:

A. 800,000 shares

B. 700,000 shares

C. 1,400,000 shares

D. 1,050,000 shares

Value of equity post repurchase:

A. $52 million

B. $26 million

C. $36.40 million

D. $41.60 million

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 Charles Underwood Co. (CUC) The company has been 100% equity owned but recently made changes to its capital structure. You have collected the following information about the recapitalization: · CUC issued $28,000,000 in new debt to buy back stock. * The firm had no short-term investments before or after the recapitalization. . CUC had 2,000,000 shares outstanding before the recapitalization. · CUC's capital structure now has 35% debt. . The company's operations are valued at $80 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? False True

Explanation / Answer

Stock price before purchase:

= $80,000,000÷2,000,000

= $40 per share

(Value of operations do not change with change in capital stricture)

Number of share repurchased:

= $28,000,000÷$40

= 700,000 shares

Value of equity repurchase post:

= $80,000,000-$28,000,000

= $52 million

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