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25 April, 02:42

Lee Manufacturing's value of operations is equal to $900 million after a recapitalization (the firm had no debt before the recap). Lee raised $300 million 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 shared before the recap. What is P (the stock prive after the recap) ?

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  1. 25 April, 04:11
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    30 per share

    Explanation:

    market value per share before recap = value of operations/number of shares before recap

    =900/30 = 30

    shares buy back number=300/30=10 million shares

    new shares after recapitalization=30-10 = 20million shares

    stock value total post recapitalization=900 * (1-1/3) = 600 million

    share price after the recap=600/20=30 per share
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