Torre Inc. is a small, sporting goods firm, with 20 million shares outstanding, trading

at $ 4 a share, and $ 20 million in debt (market value); the firms current cost of

capital is 10%. The firm is planning to recapitalize by borrowing an additional $30

million and buying back shares, thus lowering its cost of capital to 9%.

a. Assuming no growth in savings over time, estimate the change in firm value from

moving to the new debt ratio.

b. Now assume that the firm does buy back shares at $5/share. Estimate the increase

in value per share for the remaining shares.