Question 4 (11 marks) Alpha Corp is considering investing in a new product. The new product is equally likely to succeed or fail. Depending on the success of the new product, the equity and debt value of Alpha Corp next year with and without leverage are presented in the table below. Suppose Alpha Corp now has 10 million shares outstanding and no debt. Alpha Corp then announces plans to issue one-year debt with a face value of $100 million and to use the proceeds to repurchase shares. Assume a discount rate of 5% p.a. to discount all cash flows. Value of Debt and Equity with and without leverage (in $ million) Without leverage With leverage (debt face value of $100 million) Success Failure Success Failure Debt 100 60 Equity 150 80 50 0 a. What will be the share price after the debt issuance but before the share repurchases? (4 marks) b. How many shares will the company repurchase? What will be the share price after the share repurchase? (3 marks) c. What is the present value of the financial distress cost? Who bears this cost? Explain. (4 marks) Question 4 (11 marks) Alpha Corp is considering investing in a new product. The new product is equally likely to succeed or fail. Depending on the success of the new product, the equity and debt value of Alpha Corp next year with and without leverage are presented in the table below. Suppose Alpha Corp now has 10 million shares outstanding and no debt. Alpha Corp then announces plans to issue one-year debt with a face value of $100 million and to use the proceeds to repurchase shares. Assume a discount rate of 5% p.a. to discount all cash flows. Value of Debt and Equity with and without leverage (in $ million) Without leverage With leverage (debt face value of $100 million) Success Failure Success Failure Debt 100 60 Equity 150 80 50 0 a. What will be the share price after the debt issuance but before the share repurchases? (4 marks) b. How many shares will the company repurchase? What will be the share price after the share repurchase? (3 marks) c. What is the present value of the financial distress cost? Who bears this cost? Explain. (4 marks)