An all equity firm is expected to have earnings per share in perpetuity of $6.00.The current price is $50.00 per share, which implies the equity capitalization rate (r_E)is 12 percent.Suppose the firm issues debt and uses the proceeds to buy back stock so that expected earnings per share increase to $8.00 in perpetuity.Assuming a world where Modigliani-Miller Proposition I holds, what is (a) thenew share priceand (b) thenew equity capitalization rate(r_E)?

a. Thenew share priceis:

A) 40

B) 50

C) 60

D) Can not tell from the information given

E) 33

b. Thenew equity capitalization rateis

A) 10%

B) 12%

C) 14%

D) 16%

E) Can not tell from the information given