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.

Step 1

Stock Price = $15

Number of Outstanding Shares = 10 Million

Increase in Value = 50%

Calculation of Initial Value of Firm is as follows:

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:

Step 3

Value of the Firm = $81 Million

Amount from 50% Additional Shares = $37.5 Million

...

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