Firms use recapitalization for different reasons. Recapitalization is the process through which firms make desired changes in their capital structure by
using debt to repurchase equity. Firms may decide to recapitalize for various reasons, such as to maintain an optimal capital structure, to use as a
defense mechanism against a hostile takeover, to minimize taxes, or to use in an exit strategy for venture capitalists.
As an analyst, you are tracking the financial performance of Clank Rubber Co. The company has been 100% equity owned but recently made changes
to its capital structure. You have collected the following information about the recapitalization:
\begin{itemize}
\item Clank issued $8,000,000 in new debt to buy back stock.
\item The firm had no short-term investments before or after the recapitalization.
\item Clank had 1,000,000 shares outstanding before the recapitalization.
\item Clank's capital structure now has 20% debt.
\item The company's operations are valued at $40 million after recapitalization.
\end{itemize}
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.
Stock price before the repurchase
Number of shares repurchased
Value of equity post repurchase
Value
