Course: Corporate Finance Faculty: Prof.

Pramod Yadav Submitted by: Jeet K Bhatt Roll No: 14

Assignment FMC Corp.

1. What were the motivations for FMC corp. to go for recapitalization? a) To eliminate a takeover attempt: The stock was attractively valued and the company had quite a lot of cash ($403 million in 1986) in its hands. It made the company attractive to hostile takeovers. b) To give FMC employees a greater stake in the company: Company showed strong cash on its balance sheet. But the employees, who worked hard to achieve this strong financial position for the company, did not get the benefits. So, to incentivize the employees, FMC corp. went for recapitalization. c) To invest aggressively in existing businesses and concentrate on current and related issues: A strong equity position may divert the companys attention from its core business area to other unrelated areas. In the end, acquisitions could prove costly for the financial health of the company. 2. Assuming a recapitalization by way of a "leveraged cash-out" of FMC takes place; will the company be able to satisfy the interest and principal payments which the new debt term requires? In leveraged cash-out, the equity shareholders take the cash out of the business and redistribute it among themselves. The recapitalization occurs through borrowing of the debt. FMC Corp.: Existing debt: Short term debt: $37.475 million Long term debt: $303.21 million Total Existing debt : $340.685 million New debt: Bank debt : $1.3 billion Subordinated debentures: $400 million Total New debt : $1.7 billion Total debt: $2.040685 billion After new plan, total debt: $2.2billion

Course: Corporate Finance Faculty: Prof. Pramod Yadav Submitted by: Jeet K Bhatt Roll No: 14

For recapitalization, please see attached file. From the attached Excel file, we can see that FMC will be unable to service just its interest payment. 3. How does FMC corp plan to use the negative owner's equity that will be created by financial restructuring? Negative Owners equity on Balance Sheet arises when Liabilities are greater than Assets. This is due to the fact that FMC corp. went through recapitalization by way of leveraged cash-out. The negative owners equity will make FMC corp.s debt/equity ratio 154%. This will make FMC corp. unattractive to any hostile takeovers.