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NanoTech is a nanometer-sized machine manufacturer that just now has turned a profit that appears sustainable. In light of the firm's 100% equity capital structure and high profitability, the CFO believes the use of debt as a source of tax shields would be wise. Consequently, management decides to issue debt and use the proceeds to repurchase common shares. Currently, the firm has 140 million shares outstanding, level perpetual pre-tax profits of EBIT=$100 million per year, a cost of capital of rA=15%, and a marginal tax rate of T=40%. If NanoTech raises $300 million by issuing a perpetuity of riskless debt at par with a cost of debt capital of rD=5% and uses the proceeds to repurchase shares, please answer the following questions. There are no personal taxes. Until part c. there are also no bankruptcy costs, no agency costs, and no information asymmetries.
a. Before the debt issue and stock repurchase, calculate the firm's market value, stock price, and earnings per share.
b. After the debt issue and stock repurchase, calculate the firm's market value (debt plus equity), stock price, number of shares repurchased, and earnings per share.
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