An- all equity firm is subject to 30% corporate tax rate. It's total market value is initially $3,500,000. There are 175,000 shares outstanding. It announces that it will issue $1 million of bonds at 10% interest and uses the proceeds to buy back common stock.

A. What will happen to the market value of equity at the announcement of share repurchase?

B. How many shares can the firm buy back with he $1 million bond issue.

C. The cost of the unlettered equity (r0) is 20%. Use MM's II proposition to calculate the rate of return demanded by shareholders after the share repurchase?