Casa Systems, Inc specializes in communications equipment. The firm is expected to generate an unlevered cash flow (Free Cash Flow to the Firm, FCFF) of $254 million every year in perpetuity, starting in one year. The firm is financed entirely with equity and has 100m shares outstanding.

You have no further information about Casa Systems. However, you have data for Cisco Systems and Netgear, two firms in the same industry. Both Cisco Systems and Netgear maintain constant debt-to-value ratios.

The risk-free rate is 3% and the market risk premium is 9%. The corporate tax rate is 20%.

a.(5 points) What is the share price for Casa Systems?

b.(20 points) Suppose Casa Systems decides to issue debt and to pay out the proceeds from

the debt issue by repurchasing shares. The amount of debt issued will be such that the firm will switch to a 40% debt-to-value ratio. Moreover, Casa Systems plans to maintain this debt-to-value ratio constant in the foreseeable future. At this debt-to-value ratio, Casa Systems cost of debt will be 5%.

i.(5 points) Calculate the weighted-average cost of capital (WACC) for Casa Systems after the change in capital structure.

ii.(5 points) What is the value of the firm after the change in capital structure? Use either the WACC method or the APV method. (You dont need to use both methods.)

iii.(3 points) What is the market value of Casa Systems debt and equity after the

change in capital structure (i.e. after the debt issue and the share repurchase)?

iv.(7 points) What is the share price after the change in capital structure (i.e. after the debt issue and the share repurchase)? How many shares are repurchased and at what

price? How many shares are outstanding after the change in capital structure?