Timbuktu Technologies is an all-equity firm that is currently trading at $22 per share,with 50 million shares outstanding.You believe that by replacing management,you can increase the value of the firm by 50%.What is the maximum amount of value you can extract in a leveraged buyout for 50% of the outstanding shares?
A)$550 million
B)$1.1 billion
C)$1.65 billion
D)$650 million
E)$225 million

Question

Quizplus · Accepted Answer

The current value of the firm is $22 per share * 50 million shares = $1.1 billion. If the value of the firm increases by 50%, the new value would be $1.1 billion * 1.5 = $1.65 billion. By acquiring 50% of the shares, the value extracted would be 50% of the new value, which is $1.65 billion * 0.5 = $825 million. However, since you are only acquiring 50% of the shares, the maximum amount of value you can extract is the difference between the new value of the 50% shares you aim to control and their current value. The current value of 50% of the shares is $1.1 billion * 0.5 = $550 million. Therefore, the maximum amount of value you can extract in a leveraged buyout for 50% of the outstanding shares is $550 million, as this represents the current value of the 50% stake you wish to acquire before any improvements are made.

Timbuktu Technologies Is an All-Equity Firm That Is Currently Trading