Canalot plc Canalot plc is an all equity company with an equilibrium market value of 32.5 million and a cost of capital of 18% per year The company proposes to repurchase 5 million of equity and to replace it with 13% irredeemable loan stock. Canalot's earnings before interest and tax are expected to be constant for the foreseeable future. Corporate tax is at the rate of 35%. All profits are paid out as dividends. Explain and demonstrate how this change in capital structure will affect: (i) The market value (ii) The cost of equity; and (iii) The cost of capital of Canalot, using the assumptions of Modigliani and Miller