Omega Tech has 20 million shares outstanding with a market price of 15 per share and no

debt. The corporate tax rate is 21% and all the other Modigliani-Mille assumptions hold. The

rate of return on risk-free securities is 5%, the risk premium on the market portfolio is 12%,

and the beta of Omega Tech is 0.7.

a) The company is considering borrowing 100 million using risk-free permanent debt,

and distributing the 100 million raised using debt to the shareholders.

i. Show how the value of the company, the value equity and the share price

would change with the recapitalization.

ii. Comment on your results and provide an advice on whether the

recapitalization would be beneficial for Omega Tech.