Problem 4 (7 marks) Divest & Co expects EBIT to be $87,300 every year for ever. The firm can borrow at 7 percent. The company currently has no debt, and its cost of equity is 12 percent. If the tax rate is 22 percent, a) what is the value of the firm? b) The company decides to borrow $175,500 and uses the proceeds to repurchase shares i) What will the value be after the recapitalization? ii) What is the cost of equity after the recapitalization? (1.5 marks) iii) What is the WACC? What is the implication for the firm's capital structure decision? (1.5 marks) (2.5 marks) (1.5 marks)

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