A company has 10 million shares outstanding, of which management shareholders held 10%. The stock price is $24, and the market leverage ratio is 4%. It also has $40 million in cash. There is a LR proposal that would issue replace the current stock with stubs - management shareholders to receive 7 stubs for each share and non- management shareholders to receive 1 stub per share plus a special dividend of $24 per share. This will be financed by all the available cash plus an issue of debt. The company's tax rate is 30%.

If this LR is fair to both management and non-management shareholders, what is the value of a stub? 

What is the event return for non-management shareholders? For management shareholders?

 How much value has been created by the LR? What is the post-LR leverage ratio? What is your estimate of increased bankruptcy cost resulting from the new debt?