Red State Coffee is secretly considering expanding beyond Wichita. The expansion will require an initial investment of $$50$ million, and Red State management expects the present value of subsequent cashflows $($not including the initial investment$)$ to be $$200$ million. Red State$$s current capital structure is composed of $$500$ million in equity and $$300$ million in debt $($market values$),$ with $10$ million shares outstanding. There are no taxes, and the expansion will not materially affect the riskiness of Red State$$s debt. Assume that investors do not update their beliefs about the value of Red State$$s pre$-$expansion assets $($those that are collectively valued at $$800$ million$)$ in response to Red State choosing equity versus debt to finance the expansion.

$($a$)$ Red State initially proposes to fund the expansion by issuing equity. If investors were not expecting this expansion, and they share management$$s view of the expansion$$s profitability, what will the share price be once the firm announces the expansion plan but before the new shares are issued? How many shares will Red State have to issue after the announcement in order to raise enough money to fund the $$50$ million investment?

$($b$)$ Suppose investors think that the present value of the expansion$$s cashflows $($not including the initial investment$)$ will only be $$40$ million. What will the share price be once the firm announces the expansion plan but before the new shares are issued? How many shares will the firm need to issue after the announcement in order to raise enough money to fund the $$50$ million investment?

$($c$)$ Suppose Red State issues equity in part $($b$).$ Shortly after the issue, new information emerges that convinces investors that management was in fact correct in its estimates of the cashflows from expanding. What will the share price be now? Why is it different from or the same as the answer in part $($a$)?$

$($d$)$ Suppose Red State instead finances the expansion with an issue of debt equal to the dollar value of equity it would have issued in part $($b$).$ What is its new share price once the new information confirming management$$s forecast comes out? Comparing your answer with that in part $($c$),$ what is the advantage or disadvantage of debt instead of equity financing in this case?