An Introduction to Debt Policy and Walue Problem 7 7. As a way of illustrating the usefulness of the M8M theory and consolidating your grasp of the mechanios, consider the following case and complete the worksheet. Dn March 3 . 1986. Beazer PLC (a British construction company) and Shearson Lehman Hutton, Inc. (an investment banking firmi commenced a hostile tender offer to purchase all the outstanding stook of Koppers Company, Ino, a producer of construction materials, chemicals, and building products. Driginally the raiders offered $45 per share; subsequently the offer was raised to $56, and then finally $61 per share. The Koppers board generally asserted that the offers were inadequate and its management was reviewing the possibility of a major reoapitalization. To test the valuation effects of the recapitalization alternative, assume that Koppers could borrow a masimum of $1,736,095,000 at a pretan cost of debt of 10.5% and that the aggregate amount of debt will remain constant in perpetuity. Thus Koppers will take on additional debt of $1,565,686,000 (l.e. $1,738,095,000$172,409,000). Also assume that the proceeds of the loan would be paid as an extraordinary dividend to shareholders. Eshibit 1 presents Koppers' book- and market-value balance sheets assuming the capital structure before reoapitalization. Please complete the worksheet for the recapitalization alternative. Exhibit 1 An Introduction to Debt Policy and Value Koppers Company, Ine. (walues in thousands) Before After Recapitalization Recapitalization Bookvalue balanoe sheets \begin{tabular}{l|r} Long-term debt & 172,409 \\ \hline Deferred tanes, etc. & 195,616 \\ \hline Preferred stook & 15,000 \\ \hline Common equity & 430,874 \\ \hline Total oapital & 813,899 \end{tabular} Market-value balance sheets \begin{tabular}{l|r} \hline Net working capital & 212,453 \\ \hline Fined assets & 1,618,081 \\ \hline PVdebt tan shield & 58,619 \\ \hline Total assets & 1,889,153 \end{tabular} Long-term debt 172.409 Deferredtanes, eto. Preferred stook Common equity 1,701,744 \begin{tabular}{l|l} Total capital & 1,889,153 \end{tabular} \begin{tabular}{l|r} Number of shares & 28.128 \\ \hline Price per share & $0.50 \end{tabular} Walue to public shareholders Cash received Value of shares Total $1,701,744 Totalper share 60.50 Souree: Created by author using publicly available company data. An Introduction to Debt Policy and Walue Problem 7 7. As a way of illustrating the usefulness of the M8M theory and consolidating your grasp of the mechanios, consider the following case and complete the worksheet. Dn March 3 . 1986. Beazer PLC (a British construction company) and Shearson Lehman Hutton, Inc. (an investment banking firmi commenced a hostile tender offer to purchase all the outstanding stook of Koppers Company, Ino, a producer of construction materials, chemicals, and building products. Driginally the raiders offered $45 per share; subsequently the offer was raised to $56, and then finally $61 per share. The Koppers board generally asserted that the offers were inadequate and its management was reviewing the possibility of a major reoapitalization. To test the valuation effects of the recapitalization alternative, assume that Koppers could borrow a masimum of $1,736,095,000 at a pretan cost of debt of 10.5% and that the aggregate amount of debt will remain constant in perpetuity. Thus Koppers will take on additional debt of $1,565,686,000 (l.e. $1,738,095,000$172,409,000). Also assume that the proceeds of the loan would be paid as an extraordinary dividend to shareholders. Eshibit 1 presents Koppers' book- and market-value balance sheets assuming the capital structure before reoapitalization. Please complete the worksheet for the recapitalization alternative. Exhibit 1 An Introduction to Debt Policy and Value Koppers Company, Ine. (walues in thousands) Before After Recapitalization Recapitalization Bookvalue balanoe sheets \begin{tabular}{l|r} Long-term debt & 172,409 \\ \hline Deferred tanes, etc. & 195,616 \\ \hline Preferred stook & 15,000 \\ \hline Common equity & 430,874 \\ \hline Total oapital & 813,899 \end{tabular} Market-value balance sheets \begin{tabular}{l|r} \hline Net working capital & 212,453 \\ \hline Fined assets & 1,618,081 \\ \hline PVdebt tan shield & 58,619 \\ \hline Total assets & 1,889,153 \end{tabular} Long-term debt 172.409 Deferredtanes, eto. Preferred stook Common equity 1,701,744 \begin{tabular}{l|l} Total capital & 1,889,153 \end{tabular} \begin{tabular}{l|r} Number of shares & 28.128 \\ \hline Price per share & $0.50 \end{tabular} Walue to public shareholders Cash received Value of shares Total $1,701,744 Totalper share 60.50 Souree: Created by author using publicly available company data
