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Martin Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result,the firms debt equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $4 million worth of debt outstanding. The cost of this debt is 9 percent per year. The firm expects to have an EBIT of $1.39 million per year in perpetuity and pays no taxes
a) What is the market value of the firm before and after the repurchase announcement? (Do not round intermediate calculations and round final answer to nearest whole dollar)
Before $
After $
b) What is the expected return on the firms equity before the announcment of the stock repurchase plan? (Do not round intermediate calculations and enter final answer as percent rounded to 2 decimal places)
Expected Return %
c) What is the expected return on the equity of an otherwise identical all equity firm? (Do not round intermediate calculations and enter final answer as a percent rounded 2 decimal places)
d) What is the expected return on the firms equity after the announcement of the stock repurchase plan? (do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places)
Expected return %
Which of the above expenditures should be classified as sunk cash flows and which should be viewed as opportunity cash flow?
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