Mercer Corp. is a equity firm with 10 million shares outstanding and $147 million worth of debt outstanding. Its current share price is $74. Mercer's equity cost of capital is 8.5%. Mercer has just announced that it will issue $354 million worth of debt. It will use the proceeds from this debt to pay off its existingdebt, and use the remaining $207 million to pay an immediate dividend. Assume perfect capital markets.

a. EstimateMercer's share price just after the recapitalization isannounced, but before the transaction occurs.

b. EstimateMercer's share price at the conclusion of the transaction.(Hint: use the market value balancesheet.)

c. SupposeMercer's existing debt wasrisk-free with a 4.65% expectedreturn, and its new debt is risky with a 5.06%expected return. EstimateMercer's equity cost of capital after the transaction.