A company has no debt outstanding, and its financial position is given by the following data: Assets (market value=book value) $4,000,000 EBIT $666,666.67 Cost of equity, Rs 10% Stock price, P0 $20 Shares outstanding, n0 200,000 Tax rate, T (federal-plus-state) 40% The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 40% debt based on market values, its cost of equity Rs, will increase to 12 to reflect the increased risk. Bonds can be sold at a cost Rd of 8%. The company is no growth firm. Hence all its earnings are paid out as dividends. Earnings are expected to be constant over time.

10-What will be the value of the firm with the new capital structure of 40% debt?

a) $2,895,364.47

b) $3,876,369.58

c) $4,301,075.27

d) $4,385,964.91

e) $5,378,485.96

11- What is the price per share when the recapitalization is announced?

a) $19.14

b) $21.51

c) $20.36

d) $21.93

e) $22.59

12- What is the number of outstanding shares after the recapitalization?

a) 105,005

b) 120,000

c) 150,010

d) 130,005

e) 165,000

13- What is the new EPS after recapitalization?

a) $2.16

b) $2.37

c) $2.63

d) $2.96

e) $3.16