Question: Debby, the owner of Oxford Corporation, has decided that it's time to make some changes to the firm's capital structure. She estimates that Oxford's FCF is $150,000 each year and that this FCF can be expected to recur annually forever. The company has not debt and has 30,000 shares outstanding, each of which is currently worth $50. Debby wants Oxford to borrow $600,000 of perpetual debt and to use the proceeds to repurchase shares. Assuming the interest rate on debt is rD = 6% and the corporate tax rate is TC = 30%, calculate the following changes:
a. What is Oxford's market value before it issued debt?
b. What is Oxford's market value after it issued debt?
c. What will be Oxford share price after the debt issuance?
d. How many shares will be repurchased?
e. What is Oxford's equity value after the repurchase of the shares?
f. What is Oxford's cost of equity after the repurchase and dividend payment?
g. What is Oxford WACC after the repurchase and dividend payment?