Strade plc is an all equity financed company. The Finance Director suggested in a recent meeting with the Board of Directors a capital restructuring to introduce some debt in the company’s financing to take advantage of the tax benefits of debt. With a corporate tax rate of 40 per cent, he argued that the advantages make the adjustment worthwhile. His proposal is to repurchase 30 million of the company’s 100 million ordinary shares outstanding, which will be financed by an issue of debt at 8 per cent. The company’s shares are currently trading at £0.75. Whilst the company has no growth prospects, it is anticipated that the company can sustain its expected earnings for the next year of £200 million before tax indefinitely into the future. The proposal has been discussed with the company’s investment bank and no problems are anticipated in its implementation.

(a) Determine the firm’s weighted average cost of capital following the restructuring.

(b) Find the value of the geared firm.