10. Recapitalization Aa Aa 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 Gadgetime Inc. The company has been 100% equity owned but recently made changes to its capital structure. You have collected the following information about the recapitalization: • Gadgetime issued $17,500,000 in new debt to buy back stock. The firm had no short-term investments before or after the recapitalization. • Gadgetime had 1,750,000 shares outstanding before the recapitalization. • Gadgetime's capital structure now has 25% debt. The company's operations are valued at $70 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:
10. Recapitalization Aa Aa 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 Gadgetime Inc. The company has been 100% equity owned but recently made changes to its capital structure. You have collected the following information about the recapitalization: • Gadgetime issued $17,500,000 in new debt to buy back stock. The firm had no short-term investments before or after the recapitalization. • Gadgetime had 1,750,000 shares outstanding before the recapitalization. • Gadgetime's capital structure now has 25% debt. The company's operations are valued at $70 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:
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Dividend Policy
A dividend is a part of the profit paid to the shareholder in an organization. The management of the organization has the right to decide the policy for giving a dividend from the earnings to the shareholder. However, an organization is not in the obligation to declare a dividend for the investor. Dividend policy differs from organization to organization. As the management has the only authority to decide dividend rate, dividend amount, and time of dividend payout by considering all other elements that create an impact on the payment of a dividend.
Stocks And Dividends
Stock or equities are generally sold and bought in the Stock Exchange or which is popularly known as the stock market. Stocks are issued in the Stock Exchange for the sole purpose of raising funds for the Corporation or the company itself. Now since an individual has purchased a portion of the Corporation or company, he or she may claim to be a part of the earnings or profit of the company.
Question
Transcribed Image Text:10. Recapitalization
Aa Aa
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 Gadgetime Inc. The company has been 100% equity
owned but recently made changes to its capital structure. You have collected the following information about the
recapitalization:
• Gadgetime issued $17,500,000 in new debt to buy back stock.
• The firm had no short-term investments before or after the recapitalization.
• Gadgetime had 1,750,000 shares outstanding before the recapitalization.
• Gadgetime's capital structure now has 25% debt.
The company's operations are valued at $70 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:
Transcribed Image Text: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:
If Gadgetime Inc. 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?
False
True
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