Solar Panel Ltd. is a manufacturer of solar panels that is considering moving from its existing policy ofnot borrowing any money. The firm has 5 million shares outstanding, trading at $ 40 a share, no cash holdings and a beta of 1.25. The risk free-rate is 3%, the equity risk premium is 6% and the corporate tax rate is 40%.

a.Estimate the current cost of capital for the firm.

b.Assume that the firm can borrow $ 50 million at a pre-tax rate of 4% and buy back shares. Assuming that the firm is growing 3% a year in perpetuity and that investors are rational, try to estimate the change in value per share after the buyback.