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 were replaced. How much would you gain from acquiring 50% of Mayo's shares by borrowing, attaching the debt to the company and replacing the management?

Question

Quizplus · Accepted Answer

A) You would buy half the company for ($30 × 10 million) × 50% = $150 million.
After the management was replaced
the company's value = ($30 × $10 million) × (1 + 50%) = 450 million,
the company's debt = $150 million,
so the value of the equity = ($450 million - $150 million) = $300 million.
Gain from acquiring shares = $300 million - $150 million = $150 million.

Mayo Corporation Is Currently Trading at $30 Per Share