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Q15-22BP-c

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Foundations Of Financial Management
Found in: Page 500
Foundations Of Financial Management

Foundations Of Financial Management

Book edition 16th
Author(s) Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Pages 768 pages
ISBN 9781259277160

Short Answer

Question: The management of Mitchell Labs decided to go private in 2002 by buying in all 2.80 million of its outstanding shares at $24.80 per share. By 2006, management had restructured the company by selling off the petroleum research division for $10.75 million, the fiber technology division for $8.45 million, and the synthetic products division for $20 million. Because these divisions had been only marginally profitable, Mitchell Labs is a stronger company after the restructuring. Mitchell is now able to concentrate exclusively on contract research and will generate earnings per share of $1.10 this year. Investment bankers have contacted the firm and indicated that if it re-entered the public market, the 2.80 million shares it purchased to go private could now be reissued to the public at a P/E ratio of 15 times earnings per share.

c. What is the percentage return to the management of Mitchell Labs from the restructuring? Use answers from parts a and b to determine this value

The percentage return to management is 22.98%.

See the step by step solution

Step by Step Solution

Step 1: Information available

Shares outstanding = 2,800,000

Buy-back price of shares = $24.80 shares

Proceeds from sale of petroleum division = $10,750,000

Proceeds from sale of fiber technology division = 8,450,000

Proceeds from sale of synthetic product division = $20,000,000

Expected earnings per share = $1.10 per share

PE ratio = 15 times

Initial cost = $69,440,000

Cost of restructuring = $85,400,000

Step 2: Calculation of profit from restructuring

The profit from restructuring is $15,960,000.

Step 3: Calculation of percentage return to management

The percentage return to management is 22.98%.

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