Question
Recapitalization is the process through which firms make desired changes in their capital structure by using debt capital to repurchase outstanding equity. Firms use a
Recapitalization is the process through which firms make desired changes in their capital structure by using debt capital to repurchase outstanding equity. Firms use a recap for several reasons: to achieve or maintain the firms optimal capital structure, to defend against a hostile takeover, to minimize taxes, or as an exit strategy for venture capitalists.
As an analyst, you are tracking the financial performance of Blue Ram Brewing Company. The company has been 100% equity owned for years, but recently the firms managers made changes to Blue Rams capital structure. You have collected the following information regarding the companys recapitalization:
Blue Ram issued $800,000 in new debt to repurchase its outstanding stock. | |
The firm had no short-term investments before or after the recapitalization. | |
Blue Ram had 100,000 shares outstanding before the recapitalization. | |
Blue Rams capital structure now has 20.00% debt. | |
The companys operations are valued at $4,000,000 before and after the recapitalization. |
Based on the information available, solve for the values in the following table. Click on the dropdown menus and select the best answer. Assume that you are in a Modigliani and Miller (MM Proposition I) world with no taxes.
Value | |
---|---|
Stock price before the repurchase | |
Number of shares repurchased | |
Value of equity post repurchase |
Based on your findings, you prepared a report containing several inferences. While proofreading, you come across the following inference:
If Blue Ram Brewing Company decides to deleverage in the future, the total number of shares outstanding will keep decreasing until creditors own 100% of the company.
Is the statement true or false?
True
False
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