Company A generates annual EBIT of $1,600,000 and expects it to stay this way in perpetuity. The company is currently all-equity financed and the expected return on the company's 200,000 shares of equity is 9.6%. It is considering issuing $2,000,000 of debt in order to retire equity. The cost of debt is 5% and the corporate tax rate is 40%.

a) Assume there is a common borrowing rate, complete information and no transaction costs. Calculate both the current share price and the expected share price after the restructuring.

b) Suppose the actual share price after the restructuring is $53.25. What does this imply about your assumptions in part a)? Offer at least one explanation.