Part 2: Repurchases and Issuance of New Shares Background: Your friend owns 1,000 shares of stock of GameStore Inc., a prominent video game retailer, which currently has 1 million shares outstanding. Your friend thus owns. 1% of the firm, as currently structured. 13. The firm just announced that it is considering the possibility of raising $5 million of new shares (it has not committed to doing so yet). Your friend is concerned because she believes that the new share issuance will dilute her ownership stake. She mentions that if the firm issued new stock, her ownership share of the firm's dividends would go down, reducing the value of her stock holdings. What is the flaw in your friend's logic? Convince your friend that even though her percentage ownership of the firm will go down, that the total value of her shares should remain the same (i.e. the stock price will not change). 14. Suppose that the stock price is currently $25, reflecting the fact that the market believes there will be $3.00 pershare dividend payments, in perpetuity, and a 10% cost of capital. Your friend is concerned that the firm is not borrowing enough. Right now, the firm is financed exclusively by equity. But your friend points out that that GameStore Inc. recently had debt with interest of only 6%, and its finances have only improved since then. If the firm changed its capital structure to become financed by 20% debt and 80% equity (i.e. a 20%, or . 2 , debt to value ratio), what would its new cost of equity be? Assume debt and equity have the same tax treatment (so we are not using a WACC yet)