An all-equity firm has 250,000 shares outstanding. The firms assets will generate an expected EBIT of $2,000,000 per year (beginning one year from today) in perpetuity. The firm will make no new capital or working capital investments and all assets are fully depreciated. The assets have a beta of 1.5, therisk-free rate is 5%, and the market risk premium is 5%. The financial analysts at the firm have estimated the optimal capital structure to be wd= 40%; we= 60% (or, D/E = 0.67). The investment bank hired by the firm estimates that theycan issue bonds at par paying an annual coupon at a 7% annual rate. The corporate tax rate is 40%.

a)What is the value of the firm with no debt?

b)What isthe WACC at the new capital structure?

c)What is the value of firms operationsif it issues debt to shift to the new capital structure?

d)How much debt does the firm have to issue in order to operate at the new capital structure?

e)Assuming that the shares can be repurchased at the price that existed prior to the recapitalization, what would the price be following the recapitalization?