1. Lee Manufacturings value of operations is equal to $900 million aft

QUESTION

1. Lee Manufacturings value of operations is equal to $900 million after a recaptitalization (the firm had no debt before the recap). Lee raised $300 million in new debt and used this to buy back stock. Lee had no short-term investments before or after the recap. After the recap, wd = 1/3. The firm
1. Value of the firm is = $900 million. Value of the debt is =$300 million. Value of equity after recapitalisation is $600 million($900 $300). Marker price after the recap = Value of equity/No of shares before the recap.(Note: Here the equity is not changed, only the debt

s changed, therefore the portion of equiy is remains same as before shares) Market price after the recap = $600 million/30 million = $20 Therefore the market price of the share is $20.

ANSWER:

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