As an analyst, you are tracking the financial performance of Sixty Second Avenue
ID: 2727065 • Letter: A
Question
As an analyst, you are tracking the financial performance of Sixty Second Avenue Inc. (SSA) The company has been 100% equity owned but recently made changes to its capital structure. You have collected the following information about the recapitalization: SSA issued $8,000,000 in new debt to buy back stock. The firm had no short-term investments before or after the recapitalization. SSA had 1,000,000 shares outstanding before the recapitalization. SSA's capital structure now has 20% debt. The company's operations are valued at $40 million after recapitalization. Based on the information available, solve for the values in the following table. Click on the dropdown menus and then select the best answer. Assume that you are in a Modigliani and Miller (M&M;) world with no taxes.Explanation / Answer
As per MM theory, capital structure does not have impact of WACC of the company.
Price of Stock before repurchase = $40m/$1m shares = $40
Value of Debt Issued = $8,000,000
# Stock Purchased = $8,000,000 / $40 per share = 200,000 shares
Value of Equity Post Repurchase = Value of Firm - Value of Debt
= $40m - $8m = $32m
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