Solution Pages: 4
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Questions Covered in the Solution:
After reviewing his material, Fred Graham decided he had to address three major issues by the opening of the financial markets on Monday. The first was what he thought the Colt stock would sell for when the market opened. An important element in this question was the nature of the new equity shares that would remain after the restructuring. The second related to the impact of the announced restructuring on the outstanding debt. His boss had not explicitly asked for such on analysis, but Graham believed it was an important question that was sure to be raised. Finally, what would be the impact of the restructuring on Colt’s strategy? Specifically, would the restructuring affect the operational aspects of Colt fundamentally, or was it just a financial restructuring?
Sample of Solution
For what would the Colt’s Stock sell in the market on Monday?
Colt Industry which has been the client of Goldman Sachs is undergoing recapitalization which essentially means capital restructuring, changing the proportions of debt and equity of the total capital being raised. Since the company has decided to pay the existing shareholder with cash, the amount of $85 would effectively be considered as a dividend. Moreover, the shareholders would also retain their ownership by realizing another share of the recapitalized Colt industries. Although the price of this new stock would be different from its current trading price, but in essence, the issuance of new stock would ensure the ownership of existing stockholders. Furthermore, the employees would also retain their ownership; rather their ownership would be extended by the realization of stock dividend instead of the cash dividend. Additional stocks which need to be issued to the employees would be calculated by dividing $85 by the 15 days average trading price of exchanged stock of Colt.