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Homework answers / question archive / Lee Manufacturing's value of operations is equal to $900million after a recapitalization
Lee Manufacturing's value of operations is equal to $900million after a recapitalization. (The firm had no debt before the recap.) Lee raised $300million in new debt and used this to buy back stock. Lee had no short-term investments before or after the recap. After the recap, wd?=1/3.The firm had 30 million shares before the recap. What is P (the stock price after the recap)?
Computation of P (the stock price after the recap):
S = (1 - wd)(Vop) = (1 -1/3)($900)
= 2/3 *900million
= $600 million
So,
P = [S + (D - D0)] / n0
= [$600 + ($300 - $0)]/30 millions
= $30
So, P (the stock price after the recap) is $30.
