Problem:

A firm currently has equity with a market value of $600,000,000 and debt with a market value of $500,000,000. The firm has 10,000,000 shares outstanding. The bonds offer investors a return of 8%. The firm is contemplating issuing $300,000,000 in new equity and using the proceeds to repurchase $300,000,000 of the firm's debt. The corporate tax rate is 35%, the effective personal tax rate on equity income is 10% and the effective personal tax rate on interest income is 20%.

Requirements:

Question 1: What will the firm's stock price be immediately after the firm announces its refinancing plan?

Question 2: How many shares will the firm issue?

Question 3: What is the market value of the firm's (i) debt and (ii) equity immediately before the refinancing plan is announced?

Question 4: Calculate the market value of the firm's (i) debt and (ii) equity immediately after the refinancing plan is announced (but before it is actually executed).

Question 5: Calculate the market value of the firm's (i) debt and (ii) equity after the equity issue and bond repurchase are completed. Please justify your answer with the appropriate calculations and formulas.