a) Red jacket Ltd. has the following balance sheet, in market values:

Asset Value	Value of Debt and Owners Equity
Cash $60,000	Debt 0
Fixed Assets $185,000	Equity $245,000
Total $245,000	$245,000

There are 12,000 shares outstanding. The company has just declared a dividend of $2 per share.

i) What is the stock selling for today (ignore any tax effects)?

ii) What will the stock sell for tomorrow, after the dividend payout?

iii) What will the balance sheet look like, after the dividend pay-out?

b) Suppose that instead of paying a cash dividend, the firm is thinking of issuing debt to repurchase $61,260 worth of stocks. (Use the figures given in part a, and ignore taxes)

i) What effect will this have on the equity of this firm?

ii) How many shares were repurchased?

iii) What is the new number of shares outstanding?

iv) What is the new equity value?

v) What will be the price per share after the repurchase?

c) Suppose the firm goes ahead with the $2 cash dividend decision. You own 400 stocks in Nathan Gold, but would prefer a dividend of $3 per share. What should you do to receive the desired income? Assume no taxes and no transaction costs. Show calculations.

d) Briefly describe two other approaches of estimating the cost of capital of a project when the project is not of the same risk as the overall risk of the firm?