Capital restructuring and initial public offering (IPO) Mosel Wine Company is currently 100% family owned and has no debt. The family is considering for the company to (i) raise debt to buy‐out part of the family’s equity and (ii) go public to sell part of its equity to new equity/stockmarket investors, while (iii) maintaining ownership of $2 million in the company’s equity post IPO. Investment bankers estimate the total market value of the company to be $10 million at zero debt. The PV of tax‐shield benefits are estimated at 22% of the amount of debt borrowed and shown below together with the PV of bankruptcy costs: (3a) What is the optimal debt level that will maximize the total levered firm value? (3b) Post IPO, how much cash versus value of stockmarket‐listed/traded shares in the company does the family receive respectively hold? (3c) Suppose that the company has concurrently identified a highly prospective, 10‐year investment project opportunity that requires an immediate, upfront investment of $2 million and will yield an NPV of $5 million. Assuming the same PV of tax‐shields and bankruptcy costs as per above, how should the company finance this new investment project? Explain.
Questions 3 – Capital restructuring and initial public offering (IPO)
Mosel Wine Company is currently 100% family owned and has no debt. The family is considering
for the company to (i) raise debt to buy‐out part of the family’s equity and (ii) go public to sell part
of its equity to new equity/stockmarket investors, while (iii) maintaining ownership of $2 million
in the company’s equity post IPO. Investment bankers estimate the total market value of the
company to be $10 million at zero debt. The PV of tax‐shield benefits are estimated at 22% of the
amount of debt borrowed and shown below together with the PV of bankruptcy costs:
(3a) What is the optimal debt level that will maximize the total levered firm value?
(3b) Post IPO, how much cash versus value of stockmarket‐listed/traded shares in the company
does the family receive respectively hold?
(3c) Suppose that the company has concurrently identified a highly prospective, 10‐year
investment project opportunity that requires an immediate, upfront investment of $2 million and
will yield an
above, how should the company finance this new investment project? Explain.
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