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RED Corp. is an all equity firm that has 100,000 shares of stock outstanding. The company is in the process of borrowing $2 million at

RED Corp. is an all equity firm that has 100,000 shares of stock outstanding. The company is in the process of borrowing $2 million at 11% interest to repurchase 40,000 shares of the outstanding stock. Assume a perfect capital market.

(1) What is the unlevered firm value before the share repurchase?

(2) What is the value of this firm after the share repurchase if you ignore taxes?

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