Mercer Corp. is an all equity firm with 10 million shares outstanding and $77 million worth of debt outstanding. Its current share price is $73. Mercers equity cost of capital is 8.5%. Mercer has just announced that it will issue $359 million worth of debt. It will use the proceeds from this debt to pay off its existing debt, and use the remaining $282 million to pay an immediate dividend. Assume perfect capital markets.

a. Estimate Mercers share price just after the recapitalization is announced, but before the transaction occurs. b. Estimate Mercers share price at the conclusion of the transaction. (Hint: use the market value balance sheet.) c. Suppose Mercers existing debt was risk-free with a 4.58% expected return, and its new debt is risky with a 4.88% expected return. Estimate Mercers equity cost of capital after the transaction.