Maria Suarez returned to her office after spending the afternoon meeting with her firm’s investment bankers. Suarez was CFO of Midco Industries, a mid-sized manufacturing firm, and she was taking a hard look at its capital structure and payout policy. Suarez felt that Midco was underlevered and potentially not taking full advantage of the tax benefits of debt. Further complicating matters, Midco’s institutional investors had been clamoring for either a repurchase or a special dividend. One possibility floated by her investment bankers was a "leveraged recap," in which Midco would issue debt and use the proceeds to repurchase shares. Midco Industries has 20 million shares outstanding with a market price of $15 per share and no debt. The firm has had consistently stable earnings and pays a 35% tax rate. Midco’s investment bankers proposed that the firm borrow $100 million on a permanent basis through a leveraged recap in which it would use the borrowed funds to repurchase outst
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Maria Suarez returned to her office after spending the afternoon meeting with her firm’s investment bankers. Suarez was CFO of Midco Industries, a mid-sized manufacturing firm, and she was taking a hard look at its capital structure and payout policy. Suarez felt that Midco was underlevered and potentially not taking full advantage of the tax benefits of debt. Further complicating matters, Midco’s institutional investors had been clamoring for either a repurchase or a special dividend. One possibility floated by her investment bankers was a "leveraged recap," in which Midco would issue debt and use the proceeds to repurchase shares. Midco Industries has 20 million shares outstanding with a market price of $15 per share and no debt. The firm has had consistently stable earnings and pays a 35% tax rate. Midco’s investment bankers proposed that the firm borrow $100 million on a permanent basis through a leveraged recap in which it would use the borrowed funds to repurchase out of heart.