You work for a levered buyout firm and are evaluating a potential buyout of Boogle Inc. Boogle's stock price is $18, and it has 3 million shares outstanding
You believe that if you buy the company and replace its dismal management team, its value will increase by 50%. You are planning on doing a levered buyout of Boogle and will offer $25 per share for control of the company. Assuming you get 50% control, what will your gain from the transaction be?
Answer: The initial value of Boogle is $18 × 3 million shares = $54 million.
Once you take control, the value of the firm = (1 + 50%) × $54 million = $81 million
Amount borrowed = $25 × (50% × 3 million shares) = $37.5 million to acquire 50% of the outstanding shares
So, the value of the firm = $81 million - $37.5 million in debt = $43.5 million
Of this $43.5 million, $37.5 belongs to the other 50% of shareholders,
So your net gain from the transaction = $43.5 million - $37.5 million = $6.0 million
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