1.Company C is an all-equity firm with 10 million shares outstanding and $100 million worth of debt outstanding. Its current share price is $75. Company C's equity cost of capital is 8.5%. Company C has just announced that it will issue $350 million worth of debt. It will use the proceeds from this debt to pay off its existing debt, and use the remaining $250 million to pay an immediate dividend. Assume perfect capital markets.

a.Estimate Company C's share price just after the recapitalization is announced, but before the transaction occurs.

b.Estimate Company C's share price at the conclusion of the transaction. (Hint: Use the market value balance sheet)

c.Suppose Company C's existing debt was risk-free with a 4.25% expected return, and its new debt is risky with a 5% expected return. Estimate Company C's equity cost of capital after the transaction.