Firm C currently has 320,000 shares outstanding with current market value of $33 per share and generates an annual EBIT of $1,500,000. Firm C also has $1 million of debt outstanding. The current cost of equity is 9 percent and the current cost of debt is 6 percent. The firm is  considering issuing another $3 million of debt and using the proceeds of the debt issue to repurchase shares (a pure capital structure change). It is estimated that the cost of the new debt will be 7 percent and that the cost of equity will rise to 10 percent with the  additional debt. The marginal tax rate is 34 percent.

a. What is the current market value of the firm?

b. What will the firm's market value be  after the announcement of the new debt issue? (Note that total market value of debt will be D0 + D1 and the interest costs that must be  subtracted from EBIT when calculating the market value of equity must be calculated in two parts and thenadded: Kd0D0 + Kd1D1).

c. What will the estimated new share price be after the capital structure change announcement? 

d. How many shares are outstanding after the repurchase? Check answers: V0 = $11,560,000; V1 = $12,118,000; P1 = $34.74; n1 = 233,644