Bagel East Inc. is an all$-$equity firm with $20$ million outstanding shares currently

priced at $$40$ per share. Stock required return is $15\%.$ Replicator tax rate is $25\%.$ Bagel

East is considering a westward expansion that will require $$350$ million investment and

generate a pretax operating income of $$120$ million in perpetuity. Bagel East can borrow

any amount at $8\%.$

a$.$ If the firm decides on an all$-$equity financing, how many shares do you expect they

will need to sell? $($First compute the project NPV$,$ its contribution to the firm value,

the new share price once the expansion is announced, and only after that, compute the

required number of new shares$)$

b$.$Evaluate the share value, if the firm pursues debt financing.

$($use the firm value from a$,$ add the debt tax shield, revalue the price per share.$)$