16-18A. (Capital structure theory) South Bend Auto Parts has an all-common-equity capital structure. Some financial data for the company are as follows:

Shares of common stock outstanding = 600,000 Common stock price, Po = $40 per share Expected level of EBIT = $4,200,000 Dividend payout ratio = 100 percent In answering the following questions, assume that corporate income is not taxed.

a. Under the present capital structure, what is the total value of the firm?

b. What is the costof common equity capital, Kc? What is the composite cost of capital, Ko?

c. Now, suppose South Bend sells $1 million of long-term debt with an interest rate of 10 percent. The proceeds are used to retire outstanding common stock. According to the net operating income theory (the independence hypothesis), what will be the firm's cost of common equity after the capital structure change?
I. What will be the dividend per share flowing to the firm's common shareholders?
2. By what percentage has the dividend per share changed owing to the capital structure change?
3. By what percentage has the cost of common equity changed owing to the capital structure change?
4. What will be the composite cost of capital after the capital structure change?