Question

The management of Webster Labs decided to go private in 2003 by buying all $3 million outstanding shares at $18.50 per share. By 2005 management had restructured the company by selling the petroleum research division for $16 million, the fiber technology division for $9.5 million, and the synthetic products division for $20 million dollar.

Because these devisions had been only marginally profittable, Webster Labs is a stronger company after the restructuring. Webster Lab is now able to concentrate exclusively on the contract research and will generate earning per share of $1.50 this year. Investement dealers have contacted the firm and indicated that, if it returned to be a public market, the $3 million shares it purchased to go private could now be reissued to the public at a P/E ratio of 14 times earnings per share.

a. What was the initial total cost to Webster Labs to go private? (Enter your answer in millions. Round your answere to 1 decimal place.)

Initial cost: $________________million

b. What is the total value to the company from (1) the proceeds of the division that were sold, and (2) the current value of the 3 millions shares (based on the current earnings and an anticipated P/E of 14)? (Enter your answer in millions. Round your answere to 1 decimal place.)

Total value to the company $_______________________million

c. What is the percentage return to the management of Webster Labs from the restructuring? Use answers from parts a and b to determine this value. (Round your answer to 2 decimal places.)

Percentage return _____________%

Answer 1

Part A

Initial cost (cost to go private) =3 million shares * $18.50 = $55.5 million (cost to go private)

Part B

Proceeds from sale of the divisions

Petroleum research division................ $16.0million

Fiber Technology division...................... 9.5million

Synthetic products division.....................20.0million

.................................................................. $45.5million

Current value of the 3 million shares

3 million Shares * (P/E * EPS)

3 million *(14*1.50)............................. $60.0 million

Total value of the company................ $105.5 million

Part C

Total value of the company........... 105.5 million

Less: cost to go private.................. 55.5 million

Profit from restructuring................ 50 million

Percentage return = profit from restructuring / cost to go private = 50 million / 55.5 million = 90.09%