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You work for a leveraged buyout firm and are evaluating a potential buyout of Associated Steel.Associated Steel's stock price is $15 and it has 10 million shares outstanding.You believe that if you buy the company and replace its management,its value will increase by 50%.You are planning on doing a leveraged buyout of Associated Steel,and will offer $20 per share for control of the company.
-Assuming you get 50% control of Associated Steel,then your gain from this transaction will be closest to:
A)$50.0 million.
B)$62.5 million.
C)$75 million.
D)$125 million.

Question

Quizplus · Accepted Answer

The initial value of the company is $15 * 10 million = $150 million. With a 50% increase in value, the new value is $225 million. Buying 50% control at $20 per share for 5 million shares costs $100 million. The gain is $225 million * 50% - $100 million = $62.5 million.

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