Mayo Corporation is currently trading at $30 per share. There are 10 million shares outstanding, and the company has no debt. You believe that the value of the company would increase by 50% if the management team was replaced. How much would you gain from acquiring 50% of Mayo's shares by borrowing, attaching the debt to the company and replacing management?

Question

Quizplus · Accepted Answer

The current market value of Mayo Corporation is $30 x 10 million shares = $300 million. If the value increases by 50%, it would become $450 million. Acquiring 50% of the shares would give the acquirer control of 5 million shares, which is worth $150 million ($30 per share x 5 million shares). If the acquirer borrows the entire $150 million and attaches the debt to the company, the company would become worth $450 million - $150 million = $300 million. Since the acquirer owns 50% of the shares, their stake in the company would then be worth $150 million, which is a gain of $150 million - $150 million = $0. Therefore, the total gain from this transaction would be the amount of the borrowed funds that are left after repaying the debt, which is $150 million. So, the answer is C.

Mayo Corporation Is Currently Trading at $30 Per Share