The management of Mitchell Labs decided to go private in 2002 by buying in all 3 million of its outstanding shares at $19.50 per share. By 2006, management had reconstructed the company by selling off the petroleum and synthetic products division for $21 million. Because these divisions had been only marginally profitable, Mitchell is now able to concentrate exclusively on contract research and will generate earning per share of $1.25 this year. Investment bankers have contacted the firm and indicated that if it reentered the public market the 3 million shares it purchased to go private could now be reissued to the public at P/E ratio of 16 times earnings per share.
a. What was the initial cost to Mitchell Labs to go private?
b. What is the total value to the company from (1) the proceeds of the divisions that were sold, as well as (2) the current value of the 3 million shares (based on current earnings and an anticipated P/E of 16?
c. What is the percentage return to the management of Mitchell Labs from the reconstructing? Answers from a and b will determine this value