Brother, Inc. is planning to repurchase part of its common stock by issuing corporate debt. Therefore, its debt-equity ratio is expected to rise from 30% to 60%. The firm currently has 4.5 million worth of debt outstanding. The cost of this debt is 10% per year. Brother, Inc. expects to have a Free Cash Flow of $2.56 million per year in perpetuity and it pays no taxes.

a. What is the market value of Brother, Inc. before and after the repurchase announcement?

b. If Brother, Inc’s expected return on the firm’s equity before the stock repurchase plan is 14.07%, what is the expected return on the firm’s equity of an otherwise identical all-equity firm?

c. What is the expected return on the Brother Inc’s equity after the announcement of the stock repurchase plan?

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