Wolverine Corp. currently has $5,000,000 in equity outstanding and $1,000,000 in debt outstanding. The firm currently has 500,000 shares of common stock outstanding. The firm is contemplating issuing an additional $1,000,000 in debt and using the proceeds to repurchase shares. The corporate tax rate is 40%, the effective personal tax rate on equity income is 10%, and the effective personal tax rate on interest income is 20%.
(a) What will the firm's stock price be the moment after the firm announces its refinancing plan?
(b) Calculate the total market value of the firm's (i) debt and (ii) equity immediately after the refinancing plan is announced (but before it is actually executed).
(c) Calculate the total market value of the firm's (i) debt and (ii) equity after the bond issue and equity repurchase are completed.