Case 31 An Introduction To Debt Policy and Value
Case 31 An Introduction To Debt Policy and Value
Case 31 An Introduction To Debt Policy and Value
This spreadsheet was prepared by Robert F. Bruner. Copyright 1991 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved.
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Cost of equity
Now, solving for the price per share may seem impossible, because we are dealing with two
unknownsshare price and change in the number of shares:
Share Market
Price = Value of Equity
(Original - Repurchased
Shares Shares)
But by rewriting the equation, we can put it in a form that can be solved:
Referring to the results of problem 2, let's assume that all the new debt is equal to the cash paid
to repurchase shares. Please complete the following table:
1,000
7. As a way of illustrating the usefulness of the M&M theory and consolidating your grasp
of the mechanics, consider the following case and complete the work sheet. On March 3,
1988, Beazer Plc., a British construction company, and Shearson Lehman Hutton, Inc. (an
investment banking firm), commenced a hostile tender offer to purchase all the outstanding
stock of Koppers Company, Inc., a producer of construction materials, chemicals, and
building products. Originally the raiders offered $45 per share; subsequently the offer was
raised to $56, and then finally $61 per share. The Koppers board generally asserted that
the offers were inadequate and its management was reviewing the possibility of a major
recapitalization.
To test the valuation effects of the recapitalization alternative, assume that Koppers could borrow
a maximum of $1,738,095,000 at a pretax cost of debt of 10.5 percent and that the aggregate
amount of debt will remain constant in perpetuity. Thus, Koppers will take on additional debt of
$l,565,686,000 (I.e., $1,738,095,000 - $172,409,000). Also assume that the proceeds of the loan
would be paid as an extraordinary dividend to shareholders. Exhibit 1 presents
Koppers' book- and market-value balance sheets assuming the capital structure before recapitalization.
Please complete the work sheet for the recapitalization alternative.
_x000C_ Exhibit 1
Before After
Recapitalization Recapitalization