1. A company is considering spinning off a low growth division. They have gathered the following information on the full company and on the division:

Full company Low Growth Division

EBITDA 100000 20000

EV/EBITDA 10 not available

DEBT 400000 to be decided

Companies in the Low Growth Divisions industry are trading at EV/EBITDA multiples of 7, on average. Spinning off the division will reduce the EBITDA of the full company by 4000 because a number of costs, such as headquarters and IT systems, will have to be duplicated. These costs will be borne by the parent company. 1) Comment on the following statement made by the CEO of the Full Company: Spinning off the Low Growth Division will lead to a re-rating of our stock once the spinoff is completed, we will trade at higher EBITDA and PE multiples, creating substantial value for our investors. Is she correct, assuming that the Low Growth Division would be valued at its industry average multiple, which is also deemed to be a fair valuation? What do you expect the EV/EBITDA ratio of the parent company to be after the spin-off? Make any assumptions necessary to support your computation. 2) The Low Growth Division has very stable cash flows; nevertheless, the company plans to keep most of the debt in the parent company, which has quite volatile cash flows. Discuss the consequences of this decision for the market value of the debt. Would this decision be in the best interest of shareholders? 3)What do you expect the stock price response to be at the announcement of the spin-off? You do not need to give an exact number, but discuss the direction and explain why