PetSmart Bhd., is a public listed company on Bursa Malaysia that involved in selling pet food and accessories. The firm has 150 million shares outstanding, trading at $1.00 a share; it has $50 million in 10-year bonds outstanding and interest expenses on the debt amounted to $2 million. The firm currently is rated A with a cost of debt of 5% and has a levered beta of 1.56 . The risk free rate is 4.5% and the market risk premium is 4%. The corporate marginal tax rate is 40%.(15 marks)

1. Estimate the current cost of capital for PetSmart.

PetSmart announces that it will be borrowing $50 million and buying back stock at $1.07 a share. This will lower the rating to BB, with a pre-tax cost of debt of 7%. Assuming that all of the existing debt gets refinanced at this new rate, estimate the value per share after this transaction. (You can assume a growth rate of 3% in perpetuity