7. As a way of illustrating the usefulness of the M\&M theory and consolidating your grasp of the mechanics, consider the following case and complete the work sheet. On March 3, 1988, Beazer Plc, a British construction company, and Shearson Lehman 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 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 recapitalization. To test the valuation effects of the recapitalization alternative, assume that Koppers could borrow a "a maximum of $1,738,095,000 at a pretax cost of debt of 10.5 percent 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. Exhibit 1 presents Koppers' book- and market-value balance sheets assuming the capital structure before recapitalization. Please complete the work shoet for the recapitalization alternative. Exhibit 1 AN INTRODUCTION TO DEBT POLICY AND VALUE Koppers Company, Inc. (values are in thousands) 7. As a way of illustrating the usefulness of the M\&M theory and consolidating your grasp of the mechanics, consider the following case and complete the work sheet. On March 3, 1988, Beazer Plc, a British construction company, and Shearson Lehman 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 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 recapitalization. To test the valuation effects of the recapitalization alternative, assume that Koppers could borrow a "a maximum of $1,738,095,000 at a pretax cost of debt of 10.5 percent 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. Exhibit 1 presents Koppers' book- and market-value balance sheets assuming the capital structure before recapitalization. Please complete the work shoet for the recapitalization alternative. Exhibit 1 AN INTRODUCTION TO DEBT POLICY AND VALUE Koppers Company, Inc. (values are in thousands)
