We are in the MM world. For simplicity all cash flows are assumed to be perpetuity. Recall that a perpetual bond is a bond with indefinite maturity $($N$=).$ Use perpetuity concept to evaluate a perpetual bond.

Before the Announcement

Hamster Inc. is a levered firm with publicly listed shares. The firm has equity and debt but no other liabilities outstanding. The company has $250$m shares outstanding with a share price of $$16,$ an estimated equity beta of $1\mathrm{.}075$ and an expected return $($Rs$)$ of $10\mathrm{.}6\%.$ The firm has $1$ million Serial A bond outstanding with $$1,000$ face value, $6\%$ annual coupon and $6\%$ yield to maturity. Given the portfolio of assets currently managed by the firm, a stream of perpetual EBIT in the amount of $$766\mathrm{.}67$ million per annum is expected. The corporate income tax rate $($Tc$)$ is $40$ percent. Risk free rate is $2\%$ and the expected return on the market portfolio is $10\%.$

$1)$ Find Hamster$$s market value. $(15$ points$)\{$Hint: This is easier than it seems. There is a straightforward way to calculate it$.\}$

$2)$ Use the APV method to estimate Vu$.\{$Requirement: The APV method requires an estimation of Ro$.$ Using other methods to solve this problem will result in severe penalty.$\}(25$ points$)$

The Announcement

Hamster Inc. announces that it will issue $0\mathrm{.}25$m Serial B bond with $$1,000$ face value, $6\%$ annual coupon and $6\%$ yield to maturity. The firm will use the funds to retire existing equity. Therefore, this is a debt$-$equity transaction that increases the firm$$s leverage.

$3)$ Determine how this leverage$-$increasing transaction will affect shareholder value. Calculate and show the change in value at the individual shareholder level. $\{$Hint: Use MM theory.$\}(30$ points$)$