Suppose the firm in exercise 14.2 unexpectedly announces that it will issue additional debt, with the same seniority as existing debt and a face value of $50. The firm will use the entire proceeds to repurchase some of the outstanding shares.

a. What is the market price of the new debt?

b. Just after the announcement, what will the price of a share jump to?

c. Show how a shareholder with 20 percent of the shares outstanding is better off as a result of this transaction when he or she undoes the leverage change.

d. Show how the Modigliani-Miller Theorem still holds.

AppendixLO1