Mercer Corp. has 10 million shares outstanding and $96 million worth of debt outstanding. Its current share price is $80. Mercer's equity cost of capital is 8.5%. Mercer has just announced that it will issue $346 million worth of debt. It will use the proceeds from this debt to pay off its existing​ debt, and use the remaining $250 million to pay an immediate dividend. Assume perfect capital markets. a. Estimate​ Mercer's share price just after the recapitalization is​ announced, but before the transaction occurs.
​Mercer's share price just after the recapitalization is​announced, but before the transaction occurs is $80. (Round to the nearest​ dollar.)
b. Estimate​ Mercer's share price at the conclusion of the transaction. (Hint​: Use the market value balance​ sheet.)​
Mercer's share price at the conclusion of the transaction is $55. (Round to the nearest​ cent.)
c. Suppose​ Mercer's existing debt was risk free with a 4.38% expected​ return, and its new debt is risky with a 5.01% expected return. Estimate​ Mercer's equity cost of capital after the transaction.
​Mercer's equity cost of capital after the transaction is ​%. (Round to two decimal​ places.)