The Recapitalization McNulty has concluded that a moderate increase in the amount of long$-$term debt as part of Waltz$$s capital structure could enhance the company$$s stock price. Based upon his experience, McNulty has concluded that a bond rating of A would position the company$$s balance sheet to generate value for shareholders, and would also allow for a reasonable cushion against financial distress. To assist in his determination of an appropriate level of debt to issue, McNulty has gathered data on sales, earnings, debt outstanding, bond ratings and other information for companies in Waltz$$s industry. These data are given in Exhibit $5.$ McNulty quickly came to some conclusions. First, if the company does undertake a recapitalization, shares will be repurchased by means of a fixed price tender offer in which all shareholders are eligible to participate. Second, to insure a successful repurchase, McNulty will recommend that the shares be repurchased at $$27$ per share, which represents a premium of $35\%$ relative to the stock$$s current market price $$ which is currently $$20$ per share. McNulty plans to analyze the data in Exhibit $5$ to assist in coming up with a recommendation of how much debt to propose that Waltz issue. Once he has made that decision, he also intends to make a determination of what effect the recapitalization might have on Waltz$$s market value and share price. In making this determination, McNulty plans to assume that the debt level chosen by Waltz will remain constant for the foreseeable future. McNulty envisions three primary benefits from an acquisition of Waltz by Boston Cream. First, Waltz$$s products could then be sold in those stores that have exclusivity arrangements with Boston Cream. Based on McNulty$$ estimates, this would allow Waltz$$s total sales to grow at a rate of $5\%$ per year over the next four years. Beyond that point, McNulty expects sales growth to level off at $3\%$ per year. Second, Boston Cream is widely acknowledged within the dairy products industry as having the most efficient process for manufacturing its products. This efficiency is due primarily to a production process that is far more automated than that of the rest of industry. In the early $1990$s$,$ Boston Cream invested in the technology of robotics. McNulty projects that by employing Boston Cream$$s production processes, Boston Cream will be able to reduce Waltz$$s cost of goods sold as a percent of sales by one percentage point each year for the next four years. That is$,$ by the end of $2024,$ cost of goods sold as a percent of sales will be four percentage points lower than its current level. After that time, cost of goods sold as a percent of sales will remain constant at the $2024$ level meaning, of course, that the cost of goods sold will grow at the same rate as sales. Third, by combining corporate headquarters, Waltz$$s selling and administrative expenses as a percent of sales will be reduced by one percentage point and remain at this lower percentage thereafter. Exhibit $4$ contains McNulty$$ projections for capital expenditures and depreciation at Waltz under the assumption that Boston Cream will gradually replace Waltz$$s old machinery with the type of machinery used at Boston Cream. Beyond, $2024,$ McNulty expects capital expenditures and depreciation to grow at the same rate as sales. Net working capital as a percent of sales is expected to remain at Waltz$$s current level in the future. In assessing the value of Waltz as an acquisition candidate for Boston Cream, McNulty expects Boston Cream to agree with his assessment of Waltz$$s capital structure. That is$,$ after the acquisition, Waltz will have a leverage ratio comparable to that of other dairy products companies that have a bond rating of A$.$ However, Boston Cream intends to take advantage of its own AAA debt rating in borrowing funds to finance the acquisition of Waltz. McNulty expects that, if Boston Cream does acquire Waltz, it will do so by buying all of the stock of Waltz and assuming Waltz$$s currently outstanding debt. McNulty has gathered current and historical financial market data in Exhibits $6$ and $7$ to assist in his analysis. Suppose that Waltz plans to target a debt rating of A and to do so would recapitalize by issuing $$24$ million of debt and using the proceeds of the debt issue to buy back shares at a price of $$27$ per share. In answering the following questions, you may assume that the recapitalization has no impact on the probability of financial distress for Waltz. a$.$ If the company buys back shares at $$27$ per share, what would be the price per share after the recapitalization? b$.$ What would be the total market value of common stock after the recapitalization? c$.$ Is the company$$s post$-$recapitalization amount of debt consistent with that of a company with a debt rating of A$?$ What would be the maximum price that Boston Cream should be willing to pay in an acquisition of Waltz? Should Waltz recapitalize, be acquired by Boston Cream, or do nothing?