ABC Inc. currently is an all-equity firm. The value of the firm is $400M and there are 50M shares outstanding.

ABC plans to announce that it will issue $100M of perpetual bonds. The bonds will have a 2% of interest rate. The revenue from the sale of the bonds will be entirely used to buy back shares and then ABC will maintain the new capital structure indefinitely.

The expected annual pre-tax earnings of ABC are $80M. Those earnings are also expected to remain constant into the foreseeable future.

ABC is in the 40-percent tax bracket.

Assume that there is no depreciation, capital spending or net working capital requirement.

a. What is ABC's current required return on assets?

b. How many shares of stock will ABC retire?

c. What is ABC's cost of equity after capital restructuring?