Wonderland Entertainment is currently a fully equity funded company and it has 1 million shares outstanding with a market price of 10.00 per share. Given the risk of the companys future cash flows, the estimated cost of capital is 15%. Suppose the management is now considering issuing debt with a market value of 5 million to buy back its shares. The company can borrow at a rate of 8%. REQUIRED: i. Assuming a perfect market, what is the expected return on equity after the transaction? [5 marks] ii. Suppose the company pays corporate income tax at rate 40%. What is the companys after-tax WACC after the transaction? [5 marks] iii. Suppose the company pays corporate income tax at rate 40%. If the price of Wonderland Entertainment stock rises to 10.50 per share following the announcement of the recapitalization plan, what is the present value of the companys financial distress costs? [5 marks] b. Discuss the trade-off theory of capital structure and its predictions of companies debt ratios.