Restructuring reduce companys vulnerability to takeover

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A women's apparel chain with a 10 percent debt-to-assets ratio and a times interest earned of 7.0 is concerned about the possibility of losing its independence in a raid. As part of its defense management elects to sell $100 million of new debt and to repurchase some of its common stock. This will increase the debt-to-assets ratio to 60 percent and will cut times interest earned to 2.0

a. Might this restructuring reduce the company's vulnerability to a takeover? If so, how?

b. Do you think the restructuring will create value? If so, how?

c. If the tax rate is 34 percent, the interest rate is 12 percent, and the debt will be rolled-over as it matures, (i.e., assume the debt is outstanding in perpetuity) estimate the present value of the tax shield created by the restructuring at a discount rate of 14 percent.

Reference no: EM13835067

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