A company has no debt outstanding and its financial position is given by the following data. EBIT = $50 million. Tax rate = 40%. Current shares outstanding = 10 million. Current stock price = $25. Company P has a beta of 1.0. The risk-free rate is 6% and the market risk premium is 6%. The firm is considering selling bonds and simultaneously repurchasing some of its stock. It plans to move to a capital structure with 50% debt. Bonds can be sold at a cost of 12%. Company P is a no growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time.

1. What is the new cost of capital (WACC) for the firm after the increase in leverage?

2. What effect would this use of leverage have on the value of the firm?

3. What is the market value of the firms debt and equity after the increase in leverage?

4. What is the new price of companys stock? What was the percent change?