Assume the following data for MNTS Corp.:

$$ Expected EBIT: $$60$ million $($in perpetuity$)$

$$ Bonds rate: $4\%($risk$-$free$)$

$$ Cost of equity unlevered: $8\%$

$$ Currently MNTS is an all$-$equity firm with ten million shares outstanding. Before the market

opens, MNTS will announce a change in capital structure from unlevered to a debt equity ratio of

$1/2.$ MNTS will issue consol bonds $($perpetuities$)$ to buy back shares of common stock $8$ days after

announcing date. Assume markets are efficient in the semi$-$strong form.

$3\mathrm{.}1$ If the firm is tax$-$exempt, determine:

a$)$ Value of firm unlevered $($VU

$)$ and value of equity unlevered $($SU

$).[4$ points$]$

b$)$ Cost of equity levered. $[4$ points$]$

c$)$ Weighted average cost of capital. $[2$ points$]$

d$)$ Value of firm levered $($VL

$).[2$ points$]$

e$)$ Price of stock before $($P$)$ and immediately after announcing the change in capital structure $($P$*).$

$[4$ points$]$

f$)$ Did the stock price change before and immediately after the change in capital structure? Why?

Explain. $[4$ points$]$

g$)$ Value of bonds to be issued $(8$ days after the announcement$).[2$ points$]$

h$)$ Number of shares to be repurchased with debt $(8$ days after the announcement$).[2$ points$]$

i$)$ Number of shares outstanding after the shares repurchase. $[2$ points$]$

j$)$ Value of equity $($SL

$)-$after the shares repurchase. $[2$ points$]$

k$)$ Price of stock after repurchasing the shares with bond proceeds $(8$ days after the announcement$).$

$[$Hint: the stock price should be the same price as in $($f$).$ Why?$][4$ points$]$

l$)$ EPSU and EPSL $[4$ points$]$

m$)$ ROEU and ROEL

$[4$ points$]$

n$)$ Which capital structure maximizes firm value $($unlevered or levered$)?$ Explain. $[4$ points$]$ and debt to equity ratio is $1/2$

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