Locomotive Corporation is planning to repurchase part of its common stock by issuing corporate debt....
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Locomotive Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firms debtequity ratio is expected to rise from 35% to 50%. The firm currently has $3.1 million worth of debt outstanding. The cost of this debt is 6.7% per year. Locomotive expects to earn $1.075 million per year in perpetuity. Locomotive pays no taxes. a. What is the market value of Locomotive Corporation before and after the repurchase announcement? b. What is the expected return on the firms equity before the announcement of the stock repurchase plan? c. What is the expected return on the equity of an otherwise identical all-equity firm? d. What is the expected return on the firms equity after the announcement of the stock repurchase plan?
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