Whittier Optical Laboratories has an ordinary share capital structure. Relevant financial characteristics for the company are shown below:

Ordinary shares outstanding: 2,000,000

Share price P0 $11.00 per share

Expected level of EBIT: $ 4,750,000

Dividend payout ratio: 100%

Assume in answering this question that company income is not taxed.

a. Under the present capital structure, what is the total value of the firm?

b. What is the cost of equity capital, KE? What is the composite cost of capital, KO?

c.

i. Now, suppose Whittier sells $1 million of long term debt with an interest rate of 9%. The proceeds are used to retire ordinary shares. According to NOI theory (the independence hypothesis) what will be the firm's cost of ordinary equity after the capital structure change?

ii. What will be the dividend per share flowing to the firm's ordinary shareholders?

iii. By what percentage has the dividend per share changed owing to the capital structure change?

iv. by what percentage has the cost of equity changed owing to the capital structure?

v. What will be the composite cost of capital after the capital structure change?