M13-01-LeveragedRecaps

Model13-01ALeveragedRecaps—RetireEquitySharesA.InitialInputValues1.OperatingIncome(millions)$3002.SharesOutstanding(millions)(N0)1003.ManagementOwnership20%4.MarketValueperShare(P0)$305.MarketValueoftheFirm(millions)(V0)$3,0006.TaxRate(T)40%Before20%40%RecapDebtDebt1.Debt%OriginalFirmValue0%20%40%2.AmountofDebt(D)$0$600$1,200B.BalanceSheetswithIncreasingLeverage1.Cash$10$10$102.OtherCurrentAssets1001001003.Long-TermAssets,net9090904.TotalAssets$200$200$2005.Debt$0$600#########6.EquityatBook200-400-1,0007.TotalClaims$200$200$200C.EffectofTaxShieldsonSharePrices1.AmountofDebt(D)$0$600$1,2002.PresentValueofTaxShields$0$240$4803.MarketValueoftheFirm(V)$3,000$3,240$3,480D.ExplanationofLeverageRatiosandInterestCoverage1.MarketValueoftheFirm(V)$3,000$3,240$3,4802.MarketValueofEquity(S)$3,000$2,640$2,2803.SharePrice(P)$30.00$32.40$34.804.SharesRepurchasedwithDebtProceeds(Nr)0.0018.5234.485.SharesOutstanding(N0-Nr)100.0081.4865.526.BookEquity$200-$400#########7.DebttoMarketEquity0.0000.2270.5268.PretaxCostofDebt8.0%9.5%11.5%9.InterestExpense$0.0$57.0$138.0##OperatingIncome$300$300$300##InterestCoverage-5.32.2M-30Model13-01BLeveragedRecaps–EffectonManagementControlBefore20%40%RecapDebtDebt1.AmountofDebt(D)$0$600$1,2002.TotalNumberofManagementShares20.020.020.03.OriginalSharesHeldbyNonmanagementShareholders80.080.080.04.SharesRepurchasedwithDebtProceeds(Nr)0.018.534.55.NewTotalSharesHeldbyNonmanagementShareholders80.061.545.5Ownership%BeforeRecapAfterRecapShareholders80.080.0%61.575.5%45.569.5%Managers20.020.0%20.024.5%20.030.5%—————————100.081.565.5M-31