Spring Cookies is a publicly traded company that is considering a restructuring plan. The company currently has 150 million shares outstanding that are trading at a price of $15.00 per share and total debt outstanding of $225 million. It has a levered beta of 1.20, the risk-free rate is 3.5%, the equity risk premium is 5%, and the marginal tax rate is 25%.

a) Now assume that the company plans to use half of the proceeds from the new debt to buy back stock at $15.50 per share and the other half of the proceeds to pay a dividend to the remaining shareholder. Estimate the value per share of the remaining shares after the recapitalization.

b) The firm is now planning to double the amount of its debt (in dollars) and use the proceeds to pay for a combination of dividends and stock buybacks. If the increase in debt will make its bond rating drop to BBB with a default spread of 2.5% over the risk-free rate, estimate the company’s WACC after the recapitalization.

c) If the company doubles the amount of its debt, estimate the increase in its value if the firm is mature with zero growth expected in perpetuity.

Answer rating: 100% (QA)

a To estimate the value per share of the remaining shares after the recapitalization we need to calculate the new capital structure and make some assumptions 1 Calculate the market value of equity bef... View the full answer