Monroe Inc. is an all-equity firm with 1,000,000 shares outstanding. It has $7,750,000 of EBIT, and EBIT is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per share (DPS), and its tax rate is 25%. The company is considering issuing $8,000,000 of 10.00% bonds and using the proceeds to repurchase stock. The risk-free rate is 6.0%, the market risk premium is 5.0%, and the firm's beta is currently 1.0. However, the CFO believes the beta would rise to 1.390 if the recapitalization occurs. Assuming the shares could be repurchased at the price that existed prior to the recapitalization, what would the price per share be following the recapitalization? (Hint: P₀ = EPS/r_s because EPS = DPS.)

a. $44.88

b. $40.25

c. $52.89

d. $55.84

e. $47.43

Dyson Inc. currently finances with 20.0% debt (i.e., w_d = 20%), but its new CFO is considering changing the capital structure to w_d = 72.0% by issuing additional bonds and using the proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure (w_c) = 1 w_d. Given the data shown below, by how much would this recapitalization change the firm's cost of equity? Do not round your intermediate calculations. (Hint: You must unlever the current beta and then use the unlevered beta to solve the problem.)

Risk-free rate, rRF	5.00%		Tax rate, T	25%
Market risk prem., RPM	3.00%		Current wd	20.0%
Current beta, bL1	1.30		Target wd	62.0%

a. 3.40 p.p.

b. 0.62 p.p.

c. 5.67 p.p.

d. 9.07 p.p.

e. 4.77 p.p.