Mercer Corp. has10million shares outstanding and $147million worth of debt outstanding. Its current share price is $74.Mercer's equity cost of capital is8.5%.Mercer has just announced that it will issue$316million worth of debt. It will use the proceeds from this debt to pay off its existing debt, and use the remaining$169million to pay an immediate dividend. Assume perfect capital markets.

a. Estimate Mercer's share price just after the recapitalization is announced, but before the transaction occurs.

b. Estimate Mercer's share price at the conclusion of the transaction.

(Hint:

Use the market value balance sheet.)

c. Suppose Mercer's existing debt was risk-free with a 4.56%expected return, and its new debt is risky with a 4.84%expectedreturn. Estimate Mercer's equity cost of capital after the transaction.

Question content area bottom

Part 1

a. Estimate Mercer's share price just after the recapitalization is announced, but before the transaction occurs.

Mercer's share price just after the recapitalization is announced, but before the transaction occurs is

$7474.

(Round to the nearest dollar.)

Part 2

b. Estimate Mercer's share price at the conclusion of the transaction.

(Hint:

Use the market value balance sheet.)Mercer's share price at the conclusion of the transaction is

$57.1057.10.

(Round to the nearest cent.)

Part 3

c. Suppose Mercer's existing debt was risk free with a

4.56%

expected return, and its new debt is risky with a

4.84%

expected return. Estimate Mercer's equity cost of capital after the transaction.Mercer's equity cost of capital after the transaction is

enter your response here%.

(Round to two decimal places.)