Netspace Tech Inc. is an all-equity firm with 30,000,000 shares outstanding. It has $20,000,000 of EBIT, which 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). Its tax rate is 40%.

The company is considering issuing at par, $24,000,000 bonds carrying a coupon rate of 10.0%, and using the proceeds to repurchase its common stocks. The risk-free rate is 4.25%, the market risk premium is 7.0%, and the beta is currently 1.30, but the CFO believes the beta would rise to 1.40 if the recapitalization occurs.

(a) Assuming that the shares can be repurchased at the price that existed prior to the recapitalization, what would the share price be following the recapitalization? (15 Marks)

(b) Based on your analysis above, should the company proceed with the recapitalization? Explain. [Hint: You may want to comment on the new share price, capital structure, and WACC] (5 Marks)