Name 1. An all equity firm is expected to have earnings per share in perpetuity of $2.00. The current price is $40.00 per share, which implies the equity capitalization rate is 5 percent. Suppose the firm issues debt and uses the proceeds to buy back stock so that expected earnings per share increase to $3.00 in perpetuity. Assuming a world where Modigliani-Miller Proposition I holds, what is (i) the new share price and (ii) the new equity capitalization rate (TE)? 2. Gaucho Services starts life with all-equity financing and a cost of equity of 10%. Suppose it refinances to the following market value capital structure: Debt (D) Equity (E) 50% 50% at ro -6% a. Use MM's proposition 2 to calculate the new cost of equity re. b. Calculate Gaucho's after-tax weighted-average cost of capital. (Gaucho pays taxes at a marginal rate of T. -40%.)