Question 1 (answer all parts of the question)

a. Eagle Metals, an all-equity firm, is financed with 50 million shares outstanding. Its current share price is 30 per share.Eagle Metals has recently announced that it will change its capital structure by issuing 300 million in debt.The 300 million raised by debt, plus another 300 million in cash that Eagle Metals already has, will be used to repurchase existing shares.Assume that capital markets are perfect.

i. Calculate the market capitalization of Eagle Metals before this transaction takes place.

ii. Calculate the market capitalization of Eagle Metals after this transaction takes place.

iii. Calculate the number of shares that Eagle Metals will repurchase at the conclusion of this transaction. How many share will be outstanding?

iv. Suppose you are a shareholder in Eagle Metals holding 300 shares, and you disagree with the decision to lever the firm and repurchase the shares.How can you undo the effect of this decision? In addition to showing all the calculations, provide full explanation . [8 + 12 + 20 + 30 = 70 marks]

b. Discuss dividend signaling hypothesis and its implications. [30 marks]