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Question: The management of Mitchell Labs decided to go private in 2002 by buying in all 2.80 million of its outstanding shares at \(24.80 per share. By 2006, management had restructured the company by selling off the petroleum research division for \)10.75 million, the fiber technology division for \(8.45 million, and the synthetic products division for \)20 million. Because these divisions had been only marginally profitable, Mitchell Labs is a stronger company after the restructuring. Mitchell is now able to concentrate exclusively on contract research and will generate earnings per share of $1.10 this year. Investment bankers have contacted the firm and indicated that if it re-entered the public market, the 2.80 million shares it purchased to go private could now be reissued to the public at a P/E ratio of 15 times earnings per share.

c. What is the percentage return to the management of Mitchell Labs from the restructuring? Use answers from parts a and b to determine this value

Step by step solution

01

Information available

Shares outstanding = 2,800,000

Buy-back price of shares = $24.80 shares

Proceeds from sale of petroleum division = $10,750,000

Proceeds from sale of fiber technology division = 8,450,000

Proceeds from sale of synthetic product division = $20,000,000

Expected earnings per share = $1.10 per share

PE ratio = 15 times

Initial cost = $69,440,000

Cost of restructuring = $85,400,000

02

Calculation of profit from restructuring

The profit from restructuring is $15,960,000.

$$\begin{gathered} \mathbf{\text{Profit from restructuring}}\mathbf{=}\mathbf{\text{Total value of company}}\mathbf{-}\mathbf{\text{Initial cost}} \\ \mathbf{=}\mathbf{\$}\mathbf{85}\mathbf{,}\mathbf{400}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{69}\mathbf{,}\mathbf{440}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{15}\mathbf{,}\mathbf{960}\mathbf{,}\mathbf{000} \end{gathered}$$

03

Calculation of percentage return to management

The percentage return to management is 22.98%.

$$\begin{gathered} \mathbf{\text{Percentage return}}\mathbf{=}\frac{\mathbf{\text{Profit from restructuring}}}{\mathbf{\text{Initial cost}}}\mathbf{×}\mathbf{100} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{15}\mathbf{,}\mathbf{960}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{69}\mathbf{,}\mathbf{440}\mathbf{,}\mathbf{000}}\mathbf{×}\mathbf{100} \\ \mathbf{=}\mathbf{22}\mathbf{.}\mathbf{98}\mathbf{\%} \end{gathered}$$

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