Refi Corporation plans to repurchase some of its common shares by issuing corporate debt. As a result, the firm's debt-to-equity ratio is expected to increase from 30 percent to 50 percent. The firm currently has $2.7 million worth of outstanding debt. The cost of this debt is 9 percent per year. The firm expects to generate $1.26 million in EBIT per year on a permanent basis and pays no taxes.

A.	What is the market value of the firm before and after the buyback announcement? (Do not round up intermediate calculations and enter your answers rounded to the nearest whole number, not in millions of dollars, for example 1,234,567.)
B.	What is the expected return on equity of the firm prior to the announcement of the stock repurchase plan? (Do not round up intermediate calculations and enter your answer as a percentage rounded to 2 decimal places, eg 32.16.)
C.	What is the expected return on equity of a firm that is exactly the same as equity? (Do not round up intermediate calculations and enter your answer as a percentage rounded to 2 decimal places, eg 32.16.)
D.	What is the expected return on equity of the firm after the announcement of the stock repurchase plan? (Do not round up intermediate calculations and enter your answer as a percentage rounded to 2 decimal places, eg 32.16.)

Answer rating: 100% (QA)

A To calculate the market value of the firm before and after the buyback announcement we need to fir... View the full answer