1.) IPS has a market firm value of $250M with 15% of its capital structure currently in debt . IPS decides to replace some existing equity with new debt. The firms management plans to issue $50 million in new debt, which will perpetuate indefinitely (i.e., the new debt level is not temporary). This new debt will be issued with an interest rate of 7%. They will use the proceeds from this debt issue to pay existing shareholders a one-time special dividend. The change to the capital structure will cost the firm $5 million in transaction fees. After IPS makes this change, what will be the new value of the equity? Assume a tax rate of 35% and disregard any change in the present value of financial distress costs based on the capital structure change.

A. $17.5 million

B. $205 million

C. $175 million

D. $262.5 million