Motive Ltd. was established in October 1999 with its office in New Taipei City, Taiwan and it was listed on the Hong Kong Stock Exchange (stock code 1818) on May 1, 2010. The nature of the business is to produce automobile parts that include radiators, cooling devices, lighting devices, heat treatment devices, semi-finished products assembly line, as well as wheel assembly line, and others. Toyota, Honda, Mazda, Nissan, Fords, BMW, Benzes, Volvo among others are its major customers. David MUI, CEO and general manager of the Company, oversees the production, purchasing, management information systems, financial, research and development, marketing and the quality control department.

Motive Ltd. currently has $6 million worth of debt outstanding. The cost of debt is 8 percent per year. David MUI plans to announce that Motive issues debt securities and use the proceeds to repurchase common stock. As a result, the firms debt-equity ratio is expected to rise from 35 percent to 50 percent. Motive expects to have an EBIT of $2.31 million per year in perpetuity. Its main competitor is Vable Ltd. Motive Ltd. and Vable Ltd. are identical in every respect except that Vable is not levered. Assume perfect capital market in answering the questions.

A) How much is the market value of Motive Ltd. before and after the repurchase announcement?

B) Before the announcement of the stock repurchase plan, what is the expected return on the firms equity?

C) What is the expected return on the equity of Vable Ltd.?

D) What is the expected return on Motives equity after the announcement of the stock repurchase plan?