Intro

Mountain Sports Inc. currently has no debt, annual earnings before interest and taxes of $$73$ million and an

average tax rate of $34\%.$ Net income is expected to stay constant forever. The firm pays out $100\%$ of net

income as dividends.

Using the CAPM, the firm estimates that its cost of equity is $12\%.$ The risk$-$free rate is $2\%$ and the expected

equity market risk premium $($MRP$)$ is $7\%.$ There are $8$ million shares outstanding.

The firm is considering issuing bonds worth $$30$ million to repurchase its own shares at the higher market

price after announcing the recapitalization. An investment bank has estimated that the coupon rate and yield

to maturity on the bonds would be $7\%.$

Part $1$

What is the stock price before the recapitalization?

Part $2$

What will be the debt$-$to$-$equity ratio after the recapitalization?

Part $3$

What will be the cost of equity after the recapitalization?