Management of Mitchell Labs decided to go private in 2002 by buying in all 2.40
ID: 2702394 • Letter: M
Question
Management of Mitchell Labs decided to go private in 2002 by buying in all 2.40 million of it's outstanding shares at 19.80 per share. By 2006 managment had reconstructed the company by selling off the petroluem research devision for 11.80 million, the fiber technology division for 8.40 million, and the synthetic products division for 21 million. Because these divisions had only been marginally profitable, Mitchell lab is a stronger company after reconstructing. Mitchell is now able to concentrate exclusivly on contract research and will generate earnings per share of 1.40 this year. Investment bankers of contacted the firm and indicated that if it rentired the public market, the 2.40 million shares it purchased to go to private could be reissued to the public at a P/E ratio of 14 times earning per share.
A) what was the intial cost of Mitchell Labs to go private? (enter your answer in millions. Round to 2 decimal places)
B) What is the total value of the company from (1) proceeds of the divisions that were sold, as well as (2) the current value of 2.40 million shares (based on current earnings and an anticipated P/E ration of 14)? ( Enter your answer in millions. Round your intermediate calculations and final answer to 2 decimal places.)
C) What is the percentage return to the managment of Mitchell Labs from the reconstructing? Use answers from part a and b to determine this value. (Round your intermidiate answers and final answer to 2 decimal places.)
Explanation / Answer
A.
Cost to go private
= cost ofeach chasre x number of shares bought in
= $ (19.80 x 2,400,000 )
= $ 47,520,000
B.
(1) Total proceeds from the divisions sold
= $ (11,800,000 + 8,400,000 + 21,000,000)
= $ 41,200,000
(2) Value of each shares = 2,400,000 * 19.6
= $ 47,040,000
So, total value of the company = (1) + (2)
= $88,240,000
C)$ 47,520,000/$88,240,000 = 53.85 %
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