6. Recapitalization Aa Aa Firms use recapitalization for different reasons. Reca
ID: 2819939 • Letter: 6
Question
6. 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 Maclaren and Tray Corp. (MBT) The company has been 100% equity owned but recently made changes to its capital structure. You have collected the following information about the recapitalization: M&T issued $30,000,000 in new debt to buy back stock. . The firm had no short-term investments before or after the recapitalization. M&T had 2,500,000 shares outstanding before the recapitalization. M&T's capital structure now has 30% debt. The company's operations are valued at $100 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 (M8M) 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 co following inference. me across the Consider this case:Explanation / Answer
In No tax Situation as per Modigilani & miller approach, The Company's valuation will be same before and after recapitalization
1. Stock Price Before Repurchase = Value of Company / Total Stock before repurchase
Stock Price Before Repurchase = $100 Million / 250000
Stock Price Before Repurchase = $40 per share
2. Number of Shares repurchased = Total Debt Issue / Stock price before repurchase
Number of Shares repurchased = 30000000 / 40
Number of Shares repurchased = 750000 Shares
3. Value of Equity after repurchase = Current Value * Equity after repurchase / Equity before Repurchase
Value of Equity after repurchase = $100 Million * 1750000 / 2500000
Value of Equity after repurchase = $70 Million
4. Deleverage means reduction of Debt which inturn helps in increase in equity thus the statement is False
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