XYZ Ltd is an all equity company financed by 210,000 ordinary shares which have a market value of $2.50 per share. The company has earnings before interest and tax (EBIT) of $120,000 and a tax rate of 30%.

i. What is the current market value of the company?

ii. What is the current cost of ordinary equity (return on equity)?

If the company raises $200,000 of long term debt at a cost of 9% and uses the proceeds to retire outstanding shares, then

iii. What will be the market value of the restructured company?

iv. What will be the market value of ordinary equity of the restructured company?

v. What will be the cost of ordinary equity?