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
icon
Related questions
icon
Concept explainers
Question
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: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:
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.*
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.*
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps

Blurred answer
Knowledge Booster
Dividend Policy
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education