Nike currently has assets of $$5$ million. The firm is $100$ percent equity financed. The company

currently has net income of $$1$ million, and it pays out $40$ percent of its net income as dividends.

Both net income and dividends are expected to grow at a constant rate of $5$ percent per year.

There are $200,000$ shares of stock outstanding, and it is estimated that the current cost of

capital is $13\mathrm{.}40$ percent.

The company is considering a recapitalization where it will issue $$1$ million in debt and use the

proceeds to repurchase stock. Investment bankers have estimated that if the company goes

through with the recapitalization, its before$-$tax cost of debt will be $11$ percent. The company has

a $40$ percent federal$-$plus$-$state tax rate.

a$.$ What is the current value of the firm $($before the recapitalization$)?$

b$.$ Determine the present value of the equity after its recapitalization?

c$.$ Assuming that the company proceed with the recapitalization, what is the present value

of the levered firm?