Milton's current share price is $5.00 and it has 5 million shares outstanding. Suppose they announce they will borrow $15 million, using the proceeds to buy back shares.

a. What will the share price be after this announcement if we are in M&M world with no frictions?

b. Suppose instead they pay a corporate tax rate of40%,and that shareholders expect the change in debt to be permanent. If the only imperfection is corporate taxes, what will the share price be after this announcement?

c. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $5.85after this announcement, what is the PV of financial distress costs they are expected to incur as the result of this new debt?