1. GenCorp currently has 6%, perpetual debt and 10,000 shares outstanding. The debt accounts for 25% of firm value. The firms EBIT is $100,000 with zero growth. Current cost of equity is 10% and the tax rate is 40%.

1. (7 pts) What is the firms current total market value? ($714,285.7)
2. (2 pts) What is the firms current stock price? ($53.57)

The firm is considering recalling existing debt and issuing new debt at 7% which will increase the debt ratio from 25% to 40%. The new funds will be used to replace the old debt and repurchase stock. The cost of equity will increase to 11%.

3. (11 pts) Outline the steps in the market prices adjustment to the new plan. What will be the new stock price after the recapitalization? ($54.61)