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
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:The image provides a task related to finance, specifically regarding stock repurchase in a Modigliani and Miller (M&M) framework with no taxes. It consists of a table and a theoretical question.
### Task Overview:
**Instructions:**
Based on the information available, solve for the values in the table. Click on the dropdown menus and then select the best answer.
**Assumptions:**
You are in a Modigliani and Miller (M&M) world with no taxes.
### Table:
| **Value** |
|----------------------------------|
| Stock price before the repurchase |
| Number of shares repurchased |
| Value of equity post repurchase |
*The table consists of dropdown menus under each category to allow the selection of values.*
### Report and Inference:
Based on the analysis, a report with several inferences is prepared. During proofreading, the following inference is encountered:
### Case to Consider:
**Inference:**
"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."
**Question:**
Is the statement true or false?
- **False**
- **True**
*The task requires analysis and theoretical understanding of financial concepts, specifically related to stock repurchase and capital structure theory.*
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