Problem:
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%.
Required:
Question 1: What will the firm's stock price be the moment after the firm announces its refinancing plan?
Question 2: 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).
Question 3: Calculate the total market value of the firm's (i) debt and (ii) equity after the bond issue and equity repurchase are completed.
Note: Please provide full description.