Problem
Locomotive Corporation is planning to purchase part of its common stock by issuing corporate debt. As a result, the firm's debt-equity ratio is expected to rise from 35 percent to 50 percent. The firm currently has $3.1 billion worth of debt outstanding. The cost of this debt is 6.7 percent per year. The firm expects to have an EBIT of $1.75 billion per year in perpetuity and pays no taxes.
What is the market value of the firm before and after the repurchase announcement?