(Solution) - Company Y is yet another company which is currently financed -(2025 Original AI-Free Solution)

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Company Y is yet another company which is currently financed only by the Equity capital.
Y is operating in the same industry as that of X. It?s summarized Capital structure is as follows:
$
Ordinary shares ($0.25 par value) ............. 1,000,000
Reserve ........................ 1,250,000
2,500,000

Y?s current share price is $2.50 per Ordinary Share. Up to $5 million of fixed rate five years debt could be raised by Y at an interest rate of 8% per annum. The corporate tax rate is 25%.
Y?s current earnings before interest and tax are $1,500,000. These earnings are not expected to change significantly for the foreseeable future.
The Company is considering raising $2 million in debt finance. The debt finance will be used to repurchase ordinary shares.

Using Miller and Modigliani?s model in a world with corporate tax, estimate the following:
The market value of un-greased Company
The cost of equity of un-greased Company
The market value of geared Company
Observe any change to the cost of equity by the introduction of debt capital and comment on the change.