Mattala Corp. is an all-equity firm with 20 million shares outstanding and $150 million worth of debt outstanding. Its current share price is $65. Mattala's equity cost of capital is 7.5%. Mattala has just announced that it will issue $250 million worth of debt. It will use the proceeds from this debt to pay off its existing debt and use the remaining $100 million to pay an immediate dividend. Assume perfect capital markets.

a)Estimate Mattala's share price just after the recapitalization is announced, but before the transaction occurs. (3 marks)

b)Estimate Mattala's share price at the conclusion of the transaction. (Hint: use the market value balance sheet) (4 marks)

c)Suppose Mattala's existing debt was risk-free with a 4.50% expected return, and its new debt is risky with a 5.80% expected return. Estimate Mattala's equity cost of capital after the transaction. (3 marks)