1. Leveraged Recapitalization at Home Depot
Below is an a
eviated balance sheet for Home Depot (numbers in $millions). They cu
ently have 1,507 million shares outstanding at a price of $60 per share.
Management is considering issuing an additional $7 billion in debt and using the proceeds to repurchase shares in the open market. Answer the questions below using the following assumptions:
· The new debt will be kept outstanding at a fixed level perpetually.
· Home Depot’s effective corporate tax rate in recent years is 36%
1) Complete the book value balance sheet below, both before (cu
ently) and after the whole transaction (including debt issuance and share repurchase) is completed.
Before: After:
Assets:
D:
Other Liab:
E:
Assets:
D:
Other Liab:
E: :
2) Complete the market value balance sheet below, both before (cu
ently) and after the whole transaction (including debt issuance and share repurchase) is completed. Assume the market is not cu
ently aware of the planned recapitalization.
Before: After:
Assets:
D:
E:
Assets:
D:
E: :
3) Calculate the anticipated new share price after the transaction is completed. How many shares will the firm repurchase?
3
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total debt10,788
Other Liabilities11,832
Total Liabilities and Stockholders’ Equity $ 40,518
Total Stockholders’ Equity 17,898
Total Liabilities 22,620
Total Assets $ 40,518