Assume perfect capital markets and no taxes. Firm Zarav is currently financed 70% by equity and 30% by debt. Zaravs net operating income (i.e. its income before paying interest to bondholders) is $14 million per year and can be assumed to remain constant forever. Zarav estimates (based on its asset beta) that its assets should return approximately 14%. Zarav has 2 million shares of stock outstanding. Its debt is riskfree and pays 6%.

1. What is the price of each share?
2. What is the expected return on Zaravs equity?
3. Suppose that Zarav decides to raise $10 million in debt and use the proceeds to pay a cash dividend to stockholders. The debt is risk-free. What is the stock price and expected return on equity after Zarav completes these transactions?