Question content area topSuppose PayPal$($PYPL$)$ has no debt and an equity cost of capital of

$9\mathrm{.}2\%9\mathrm{.}2\%.$

The average$$ debt$-$to$-$value ratio for the credit services industry is

$15\mathrm{.}4\%15\mathrm{.}4\%.$

What would its cost of equity be if it took on the average amount of debt for its industry at a cost of debt of

$5\mathrm{.}9\%5\mathrm{.}9\%?$

Part $1$

Zetatron is an$$ all$-$equity firm with

$160160$

million shares$$ outstanding, which are currently trading for

$$$$23\mathrm{.}3623\mathrm{.}36$

per share. A month$$ ago, Zetatron announced it will change its capital structure by borrowing

$$$$695695$

million in$$ short$-$term debt, borrowing

$ $413$$$413$

million in$$ long$-$term debt, and issuing

$$$$514514$

million of preferred stock. The

$$$$1$ comma $6221,622$

million raised by these$$ issues, plus another

$ $36$$$36$

million in cash that Zetatron already$$ has, will be used to repurchase existing shares of stock. The transaction is scheduled to occur today. Assume perfect capital markets.

a$.$ What is the market value balance sheet for Zetatron

i$.$ Before this$$ transaction?

ii$.$ After the new securities are issued but before the share$$ repurchase?

iii. After the share$$ repurchase?

b$.$ At the conclusion of this$$ transaction, how many shares outstanding will Zetatron$$ have, and what will the value of those shares$$ be$?$