The Rivoli Company has no debt outstanding, and its financial position is given by the following data:

Assets (Market value = Book value)$3,500,000EBIT$600,000Cost of equity, rs12%Stock price, P0$17.50Shares outstanding, n0200,000Tax rate, T (federal-plus-state)30%

The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 25% debt based on market values, its cost of equity, rs, will increase to 15% to reflect the increased risk. Bonds can be sold at a cost, rd, of 8%. Rivoli is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time.

What will be the new value of the firm afterthis change?

$2,700,000$3,320,158$3,000,000$3,120,214$3,500,000