CU Limited is deciding to issue debt to buyback part of its equity. The proposed new capital structure will increase its debt-to-equity ratio from 40% to 50%. With an interest cost at 10% p.a., the annual interest on its current outstanding debt amounts to $750,000. The EBIT is expected to be $3,750,000. Treat the debt and EBIT as perpetuities. There are no taxes.

(a) What is the total value of CU Limited under the old capital structure? (b) What is the expected return on equity before and after the announcement of capital structure changes? (c) How would the cost of equity change at the announcement of the repurchase? Explain the difference in the cost of equity before and after the announcement.