For Case 31 Management of Corporate Capital Structure.

Apply the M&M theory to complete the worksheet for the recapitalization alternative on page430. Again use excel spreadsheet and correct cell formula. Based on your calculation result, do you think the recapitalization alternative will deter the hostile tender offer at $61 a share?

As a way of illustrating the usefulness of the M&M theory and consolidating you grasp of mechanics consider the following case and complete the worksheet. On March 3, 1988 Beazer PLC (a British construction company) and Shearson Lenman Hutton Inc. (an investment banking firm) commenced a hostile tender offer to purchase all the outstanding stock of Koppers Company, Inc. a producer of construction materials, chemicals and building products. Originally , the raiders offered $45 a share; subsequently the offer was raised to $56 and then finally to $61 a share. The Koppers board asserted that the offers were inadequate and its management was reviewing the possibility of a major recapitalization. To tes the valuation effects of the reapitalizaion alternative, assume that Koppers could borrow a maximum of $1,738,095,000 at a pretax 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 (that is $1,738,095,000 minus $172,409,000). Also, assume that the proceeds would be paid as an extrodinary dividen dividend to shareholders. Exhibit 1 presents Koppers' book and market value balance sheets, assuming the capital structure before recapitalizaion. Please complete the worksheet for the capitalization alternative.

art Six Management of the Corporate Capital Structure EXHIBIT 1 I Koppers Company, Inc. (values in thousandte Before Recapitalization After $ 212,453 601,446 Book-Value Balance Sheets Net working capital Fixed assets Total assets 813,899 Long-term debt Deferred taxes, etc. Preferred stock Common equity Total capital 172,409 195,616 15,000 430,874 813,899 Market-Value Balance Sheets Net working capital Fixed assets PV debt tax shield Total assets $212,453 1,618,081 58,619 1,889,153 172,409 Long-term debt Deferred taxes, etc. Preferred stock Common equity Total capital 15,000 1,701,744 $1,889,153 Number of shares 28,128 S 60.50 Price per share Value to Public Shareholders Cash received Value of shares Total Total per share $1.701.744 $1,701,744 S 60.50