Mercer Corp. is a equity firm with 10 million shares outstanding and $50 million worth of debt outstanding. Its current share price is $62. Mercer's equity cost of capital is 8.5%.

Mercer has just announced that it will issue $365 million worth of debt. It will use the proceeds from this debt to pay off its existing debt, and use the remaining $315 million 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 4.57% expected return, and its new debt is risky with a 5.01%expected return. Estimate Mercer's equity cost of capital after the transaction.

45) Yellowknife Mining has 70 million shares that are currently trading for $3 per share and $170 million worth of debt. The debt is risk free and has an interest rate of 5%,and the expected return of Yellowknife stock is 9%. Suppose a mining strike causes the price of Yellowknife stock to fall 27% to $2.19 per share. The value of the risk-free debt is unchanged. Assuming there are no taxes and the risk (unlevered beta) of Yellowknife's assets is unchanged, what happens to Yellowknife's equity cost of capital?