As Karim’s all-equity firm has now become mature, he is thinking to add debt for the first time to his capital structure.  His all-equity firm has a market value of RM20 million and wanted to issue a perpetuity bond worth RM 2 million with a coupon rate of 7% and use these proceeds to repurchase shares. Karim’s firm pays a corporate tax of 40%. Assume taxes are the only imperfection and the debt is expected to be permanent.

 i)

What would be the total value of the firm after the change in the capital structure?

 ii)

What would be the value of the remaining equity after the change in the capital structure?