Recapitalization

Firms use recapitalization for different reasons. Recapitalization is the process through which firms make desired changes in their capital structure by using debt to repurchase equity. Firms may decide to recapitalize for various reasons, such as to maintain an optimal capital structure, to use as a defense mechanism against a hostile takeover, to minimize taxes, or to use in an exit strategy for venture capitalists.

As an analyst, you are tracking the financial performance of Clank Rubber Co. The company has been 100% equity owned but recently made changes to its capital structure. You have collected the following information about the recapitalization:

	Clank issued $8,000,000 in new debt to buy back stock.
	The firm had no short-term investments before or after the recapitalization.
	Clank had 1,000,000 shares outstanding before the recapitalization.
	Clanks capital structure now has 20% debt.
	The companys operations are valued at $40 million after recapitalization.

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

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

Based on your analysis, you prepared a report with several inferences. While proofreading, you come across the following inference.

Consider this case:

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

Is the statement true or false?

True

False