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What is the dollar gain in value per share

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Interco is a publicly traded firm with two main operating divisions in paper products and biotechnology. The paper division generates EBIT of $12M per year and biotech generates EBIT of $3M. Interco's shares currently trade at $10 per share, with 10M shares outstanding. Interco's CEO, Shelly, is concerned that Interco is undervalued. Comparable publicly-traded paper products firms are trading at an EV/EBIT multiple of 6. Comparable publicly-traded biotechnology firms are trading at an EV/EBIT multiple of 20.

a) Shelley considers spinning off the biotech division as a separate company, Cellzyme. Under the spinoff, each shareholder of Interco would receive two shares in Cellzyme.

b) Assume the spinoff enables the market to recognize the true value of the operating divisions. If the spinoff is executed immediately and costs nothing to implement, what is the predicted price of Interco and Cellzyme at the end of the first trading day?

c) What is the dollar gain in value per share for the original shareholders of Interco?

Reference no: EM133076492

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