Question: You are the new CFO of Megasoft. Megasoft has $ 1billion market value. It currently has no debt. Corporate tax rate is 40%. You make a compelling argument to the board that debt will enhance shareholder value. The board authorizes you to issue risk-free debt and buyback some stock using ALL the proceeds of debt. The board wants the post-leverage capital structure to have exactly 20% debt (B/VL=0.2). You will soon make an announcement to the shareholders about your plans to issue debt and buyback some stock.
a) Suppose you owned $ 1,000 worth of shares before the announcement. What will be the value of your shares after Megasoft is levered. Assume that you don't sell any shares.