Syntonic Limited is an Australian-based company subject to the classical tax system, with a corporate tax rate of 30%. Historically, the company has been successful with its projects and currently generating earnings before interest and taxes (EBIT) of $8 million per year, and this level of earnings is assumed to continue forever. However, due to increased competition in its markets, many of its customers are shifting to new service providers. All of the companys finance has come from shares issued at a cost of 18%. Due to a boardroom dispute, the company is proposing to buy back shares from a group of dissatisfied shareholders by borrowing $28 million at an interest rate of 15%.

(i) What is the value of the company with an all-equity capital structure? [

(ii) According to Modigliani and Miller (MM) approach with corporate taxes, what is the value of the company if it borrows the money and uses it to repurchase shares?

(iii) Explain the financial distress risk of Syntonic Limited after it had borrowed the money to buy back its shares?