Consider a stable firm with a market value of 1,000 that produces cash of 100 per year forever. The cost of capital for the firm is 10%.

1. a.Assume that the firm is financed with 100% equity. What is the P/E ratio? b.Assume that if the firm refinances to a capital structure where 500 is financed with debt and 500 is financed with equity, then its debt has a cost of capital of 7.5% and the equity has a cost of capital of 12.5%. What is the firm's equity P/E ratio now? c.Has the increase in debt increased or decreased the firm's P/E ratio?