Question $3$

King Inc. is an all$-$equity firm with $5,000$ outstanding shares. Its firm value is $$250,000$ and

EBIT is $$36,000$ per year forever. The tax rate is $40\%.$ King is considering two recapitalization

plans.

Plan A: borrow $$125,000$ perpetual debt at $5\%$ interest to repurchase stocks and the present value

of bankruptcy costs is estimated to be $$0.$

Plan B: borrow $$160,000$ perpetual debt at $8\%$ interest to repurchase stocks and the present value

of bankruptcy costs is estimated to be $$7,500.$

$($a$)$ Calculate the equity value, cost of equity, weight average cost of capital, stock price after

recapitalization plan A$.$

$($b$)$ Calculate the equity value, cost of equity, weight average cost of capital, stock price after

recapitalization plan $B.$

$($c$)$ Calculate the breakeven EBIT of the two recapitalization plans.