Question

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.

a. What was the initial cost to Mitchell Labs to go private?

Short answer

Answer

The initial cost to go private is $69,440,000.

Step-by-step solution

Information provided in the question

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

Calculation of net cost to the company for going private

The net cost of going private is $69,440,000.

$$\begin{gathered} \mathrm{Net}\mathrm{cost}\mathrm{of}\mathrm{going}\mathrm{private}=\mathrm{Number}\mathrm{of}\mathrm{outstanding}\mathrm{shares}\times \mathrm{Share}\mathrm{price} \\ =2,800,000\times \$24.80 \\ =\$69,440,000 \end{gathered}$$