Locomotive Corporation is planning to repurchase part of itscommon stock by issuing corporate debt. As a result, the firm’sdebt–equity ratio is expected to rise from 35 percent to 50percent. The firm currently has $3.1 million worth of debtoutstanding. The cost of this debt is 8 percent per year. The firmexpects to have an EBIT of $1.3 million per year in perpetuity andpays no taxes.

  

a.	What is the market value of the firm before and after therepurchase announcement? (Enter your answers in dollars,not millions of dollars, e.g., 1,234,567. Do not round intermediatecalculations and round your answers to the nearest whole number,e.g., 32.)

  

	Market value
Before	$
After	$

  

b.	What is the expected return on the firm’s equity before theannouncement of the stock repurchase plan? (Do not roundintermediate calculations and enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)

  

Expected return

%

  

c.	What is the expected return on the equity of an otherwiseidentical all-equity firm? (Do not round intermediatecalculations and enter your answer as a percent rounded to 2decimal places, e.g., 32.16.)

  

Expected return

%

  

d.	What is the expected return on the firm’s equity after theannouncement of the stock repurchase plan? (Do not roundintermediate calculations and enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)

  

Expected return

%