Schwartz Industry is an industrial company with 101.7 million shares outstanding

Question

Schwartz Industry is an industrial company with 101.7 million shares outstanding and a market capitalization (equity value) of $3.56 billion. It has $1.46 billion of debt outstanding. Management have decided to delever the firm by issuing new equity to repay all outstanding debt. a. How many new shares must the firm issue? b. Suppose you are a shareholder holding 100 shares, and you disagree with this decision. Assuming a perfect capital market, describe what you can do to undo the effect of this decision.

Explanation / Answer

a.) Number of Shares Outstanding =101.70 million

Equity Market Cap =$ 3.56 billion

Value Per Share =3,560,000,000/101,700,000 =$35.00

Current Outstanding Debt =$1.46 billion

Number of new shares to be issued =1,460,000,000/35 =41.71 million

b.) Since it is a case of additional equity financing, it will result in diluting the share of existing equity investors. To protect the interests, an investor holding 100 shares may raise the call and ask the management to reconsider the decision in a perfect capital market. Since he is a shareholder, he has the right to question the decisions of the management in regards to raising further equity.

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