How much did the leveraged recap create for shareholders? Compute the change in the sealed airs market value of equity from 4/27/1989 to 4/28/1989

1 Leveraged Recapitalization Air is going to undertake a leverage recapitalization (or leveraged Recap). A leveraged recap usually consists of taking out a loan and paying out the proceeds of the loan to shareholders For example, suppose that a firm expects to have $30.00 in operating cash flows in perpetuity.I also has $150 in risk free debt tha tax rate, no depreciation expense, no capital expenditures, and no net working eapital. The frma WACC is 10%, therefore the value of the firm is t it plans to hold in perpetuity with an interest rate of 5%, a 0% $30 0:10 $300 Using the fundamental accounting identity, Asseta worth $150 Debt Equity, implics that the equity is The market value of the firm's asset, debt and equity ean also be represented by the following market valuc balance shect. You can think of a market value balance sheet as a the typical accounting balanee sheet where all the values are reported in market valucs as opposed to book values. The balanee sheet before the firm goes and gets the loan reports the firm has assets with s market valuc of $300. These assets are finaneed by $150 of debt and $150 of equity Balance sheet: before loan Assets $300 Debt $150 Equity $150 $300 Total $300 Now supposc that the firm wishes to take on more debt and pay the procoeds out to sharcholders Suppose the firm gets n new lonn of $100 so that its total deht will be $250. Balance sheet: after losn Assets $300 Debt $250 Cash S100 Equity $150 Total $400 $100 Balanee sheet: after pasoot