Value of Equity after Recapitalization Nichols Corporations

Value of Equity after Recapitalization

Nichols Corporation\'s value of operations is equal to $500 million after a recapitalization (the firm had no debt before the recap). It raised $200 million in new debt and used this to buy back stock. Nichols had no short-term investments before or after the recap. After the recap, wd = 40%. What is S (the value of equity after the recap)? Enter your answer in millions of dollars.

$ _____million

Solution

given,

debt = $200 million

weight of debt after recap = 40%.

total capital after recap = debt / weight of debt =>$200 million /0.40

=>$500 million.

value of equity after recap = total capital after recap - total debt after recap

=>$500 million - $200 million

=>$300 million

value of equity after recap = $300 million or $300,000,000.