Consider a firm whose capital structure includes 40% debt worth 60 million dollars and 60% equity worth 90 million dollars. Suppose that the firm could effect a change in the capital structure (leaving the firm's assets unchanged), such that the new structure was 60% debt worth 99 million dollars and 40% equity worth 66 million dollars. This could be accomplished by having the firm borrow money and buying back shares (something many established companies do in real markets). The details (the before and after status of the company) is shown below. Would the stockholders favor such a change ( why or why not?)

Before:

Debt= 40% , $60 million

Equity= 60% , $90 million

After:

Debt= 60% , $99 million

Equity= 40% , $66 million

a) Has the total value of the firm changed due to the process described above?

b) If so, what was the value before and what is the value after?

c) Has the risk of the firm changed?

d) Would shareholders favor such a transaction?