The Rivoli Company has no debt outstanding and its financial position is given by the following data: Market value of Assets $10,000 EBIT $ 1,500 Stock price $10 Shares outstanding 1,000 Tax rate 35% The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 40% debt based on market values, the bonds can be sold at a cost, rd, of 8%. Rivoli is a no-growth firm and all of its earnings are paid out as dividends.

a. What is Rivolis current cost of equity?

b. If the risk free rate is 3 percent and the market risk premium is 5 percent, what is Rivolis unlevered beta?

c. What is the levered beta at the new capital structure of 40 percent debt?

d. What is the new cost of equity under the capital structure financed with 40 percent debt?

e. What is its new weighted average cost of capital?

f. What is the new total corporate value of Rivoli?

g. What is the new stock price?

h. How many shares remain outstanding after the recapitalization?