9. The process of recapitalization

Recapitalization is the process through which firms make desired changes in their capital structure by using debt capital to repurchase outstanding equity. Firms use a recap for several reasons: to achieve or maintain the firms optimal capital structure, to defend against a hostile takeover, to minimize taxes, or as an exit strategy for venture capitalists.

As an analyst, you are tracking the financial performance of Merry Meerkat Manufacturing Company. The company has been 100% equity owned for years, but recently the firms managers made changes to Merry Meerkats capital structure. You have collected the following information regarding the companys recapitalization:

	Merry Meerkat issued $1,400,000 in new debt to repurchase its outstanding stock.
	The firm had no short-term investments before or after the recapitalization.
	Merry Meerkat had 175,000 shares outstanding before the recapitalization.
	Merry Meerkats capital structure now has 20.00% debt.
	The companys operations are valued at $7,000,000 before and after the recapitalization.

Based on the information available, solve for the values in the following table. Click on the dropdown menus and select the best answer. Assume that you are in a Modigliani and Miller (MM Proposition I) world with no taxes.

	Value
Stock price before the repurchase
Number of shares repurchased
Value of equity post repurchase

Based on your findings, you prepared a report containing several inferences. While proofreading, you come across the following inference:

Recapitalization might increase the firms EPS, but the price per share remains the same.

Is the statement true or false?

False

True