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13 April, 13:23

Nichols Corporation's value of operations is equal to $500 million after a recapitalization (the firm had no debt before the recap). It raised $150 million in new debt and used this to buy back stock. Nichols had no short-term investments before or after the recap. After the recap, wd = 30%. What is S (the value of equity after the recap) ? Enter your answer in millions of dollars.

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  1. 13 April, 14:15
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    Value of equity $350 million

    Explanation:

    The value of a levered firm is the sum of the value of equity and the value of debt securities

    The total value = Value of equity + Value of debt

    Value of debt = 30% * 500

    = $150 million

    Value of equity = Value of company - Value of debt

    = $500 million - $150 million

    = $350 million
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