Interco is a publicly traded firm with two main operating divisions in paper products and biotechnology. The paper division generates EBIT of $12M per year and biotech generates EBIT of $3M. Interco's shares currently trade at $10 per share, with 10M shares outstanding. Interco's CEO, Shelly, is concerned that Interco is undervalued. Comparable publicly-traded paper products firms are trading at an EV/EBIT multiple of 6. Comparable publicly-traded biotechnology firms are trading at an EV/EBIT multiple of 20.

a) Assume the comparables yield insight into the true, fundamental value of Interco's operating divisions. By how much is Interco undervalued (in $)?

Shelley considers spinning off the biotech division as a separate company, Cellzyme. Under the spinoff, each shareholder of Interco would receive two shares in Cellzyme.

b) Assume the spinoff enables the market to recognize the true value of the operating divisions. If the spinoff is executed immediately and costs nothing to implement, what is the predicted price of Interco and Cellzyme at the end of the first trading day?

c) What is the dollar gain in value per share for the original shareholders of Interco?

Shelley alternately considers an equity carve-out of a portion of Cellzyme. Assume Interco initially owns 20M Cellzyme shares. She is advised by her investment bankers that a sale of 20% stake of Cellzyme for $10M would be well-received by investors. She is considering a primary offering, whereby Cellzyme would issue new shares. After the carve-out, Interco would be left owning 80% of Cellzyme. Assume the proceeds from the primary offering stay in Cellzyme.

d) If Shelley pursues the primary carve-out of 20% of Cellzyme for $10M, what is the number of shares and price per share that would be sold?

e) Assume the carve-out allows the market to realize the true value of Interco's operating divisions. At what price would Cellzyme shares trade? Interco shares?

f) (2 pts) Under what circumstances would Shelley choose the carve-out over the spin-off?