3. The firm is an all-equity firm with assets worth $350 million and 100 million shares outstanding. It plans to borrow $100 million and use these funds to repurchase shares. The firms marginal corporate tax is 21%, and it plans to keep its outstanding debt equal to $100 million permanently. If the firm manages to repurchase shares at $4 per share, what is the per share value of equity for the leveraged firm?

A) $2.71 per share

B) $3.5 per share

C) $3.61 per share

D) $3.71 per share

E) $4 per share

2. Which of the following statement is true regarding the Modigliani and Miller (M&M) propositions (1958) in a perfect financial market? A) Capital structure is irrelevant because of the assumption that investors and companies have differing tax rates.

B) It is assumed that the firms future cash flows remain fixed under any circumstances.

C) The basic lesson of M&M propositions is that companys capital budgeting decisions are dependent upon the company's capital structure decision.

D) The debt-to-equity ratio is an important measure of the firms operational risk. E) The firms cost of capital (WACC) is not affected by leverage; however, the firms cost of equity RE may be affected by leverage.