(Associated Steel, continued) You work for a leveraged buyout firm and are evaluating a potential buyout of Associated Steel. Associated Steel's stock price is $15 and it has 10 million shares outstanding. You believe that if you buy the company and replace its management, its value will increase by 50%. You are planning on doing a leveraged buyout of Associated Steel, and will offer $20 per share for control of the company.Regarding your tender offer, shareholders will:Answer choicesA) not tender their shares since the post LBO price is higher than the current price.B) tender their shares since the post LBO price is lower than the current price.C) not tender their shares since the post LBO price is higher than the offer price.D) tender their shares since the post LBO price is higher than the offer price.

Question
Asked Nov 18, 2019
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(Associated Steel, continued) You work for a leveraged buyout firm and are evaluating a potential buyout of Associated Steel. Associated Steel's stock price is $15 and it has 10 million shares outstanding. You believe that if you buy the company and replace its management, its value will increase by 50%. You are planning on doing a leveraged buyout of Associated Steel, and will offer $20 per share for control of the company.

Regarding your tender offer, shareholders will:

Answer choices
A) not tender their shares since the post LBO price is higher than the current price.
B) tender their shares since the post LBO price is lower than the current price.
C) not tender their shares since the post LBO price is higher than the offer price.
D) tender their shares since the post LBO price is higher than the offer price.
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Expert Answer

Step 1

Stock Price = $15

Number of Outstanding Shares = 10 Million

Increase in Value = 50%

 

Calculation of Initial Value of Firm is as follows:

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Initial Value of F irm = (Stock Pricex Number of Outstanding Shares) +(Stock Pricex Number of Outstanding Sharesx Increase in Value) = ($15x10 Million)+($15x 10 Million x 50%) = $150 Million ($150 Million x 50%) = $150 Million +$75 Million $225 Million

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Step 2

Total Number of Outstanding Shares = 10 Million

Increase in Value = 50%

Additional Number of Outstanding Shares = 10 Million × 50% = 5 Million

Buyout Price per Share = $20

 

Calculation of amount raises from 50% additional shares is as follows:

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Am ount from 50% Additional Shares =Additional Number of Outstanding Shares x Buyout Price per Share =5 Million x $20 $100 Million

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Step 3

Value of the Firm = $81 Million

Amount from 50% Additional Shares = $37.5 Million

 

...

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Value of Firm Initial Value of the Firm - Amount from 50% Additional Shares =$225 Million - $100 Million $125 Million

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