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 firms debt. The corporate tax rate is 35, the effective personal tax rate on equity income is 10% and the effective tax rate on interest income is 20%.

Required:

Question 1: What will the firms 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 excuted)

Question 5: Calculate the market value of the firm's (i) debt and (ii) equity after the equity issue and bond repurchase are completed.

Note: Please provide equation and explain comprehensively and give step by step solution.