The Company X is solely financed by common stock and has outstanding 25 Mn shares with market price of Rs 15 a share. The book value of each share is Rs. 10. The cost of capital of unlevered firm is 15% p.a. The asset beta for company is 1.5. It intends to introduce risk free debt of Rs. 160 Mn in the capital structure and use it to buy back common stock. The risk-free rate of interest is 6% p.a. Assume debt to be perpetual in firm at the same interest rate.

a) How the market price of stock will be affected by announcement?

b) What will be the market value of firm after announcement if there are no taxes?

c) What will be the market value of firm after announcement if tax rate applicable to firm is 30%?

d) What will be the cost of equity of company after announcement assuming no taxes?

e) What will be the overall cost of capital after announcement assuming no taxes?

f) What will be the asset beta of company after announcement assuming no taxes?

g) What will be the equity beta of company after announcement assuming no taxes?

h) What will be P/E ratio of company after announcement assuming no taxes?

i) What will be cost of equity of company after announcement if tax rate applicable to firm is 30%?

j) What will be the overall cost of capital after announcement if tax rate is 30%?