Question

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)?

Answer 1

30 per share

Step-by-step 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