Lee Manufacturing's value of operations is equal to $900million after a recapitalization

Finance Mar 08, 2021

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)?

Expert Solution

Computation of P (the stock price after the recap):

S = (1 - w_d)(V_op) = (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.

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