Consider an all-equity firm valued at $1 billion, and a CEO who owns $20 million in stock.
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Consider an all-equity firm valued at $1 billion, and a CEO who owns $20 million in stock. Suppose the firm implemented a 90% “Leveraged Recapitalization” whereby it borrowed and simultaneously paid dividends of $900 million. The firm still has a total value of $1 billion, but the capital structure now consists of $900 million in debt and only $100 million in equity.
Suppose that the CEO participates in the dividend along with everybody else.
How much cash does he get in the dividend, and how much are his shares worth in the recapitalized company? (Provide your answer with a short explanation.)
Related Book For
Fundamentals of Financial Management
ISBN: 978-0324664553
Concise 6th Edition
Authors: Eugene F. Brigham, Joel F. Houston
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