Question

Value of Equity after Recapitalization Nichols Corporation's value of operations is equal to $500 million after a recapitalization (the firm had no debt before the recap). It raised $300 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 = 60%. What is S (the value of equity after the recap)? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to the nearest whole number. $ million

Answer 1

$300 million

Step-by-step explanation:

Computation of S the value of equity after the recap

First step is to find the Value of debt using this formula

Value of debt = (New Debt / WD) - Value of Debt

Let plug in the formula

Value of debt = [$300 million / 0.60] - $300 million

Value of debt =500 million -$300 million

Value of debt =$200 million

Second step is to calculate for the Value of equity using this formula

Value of equity = Total market value - Value of debt

Let plug in the formula

Value of equity= $500 million - $200 million

Value of equity = $300 million

Therefore S the value of equity after the recap will be $300 million.