BHP Billiton is the world's largest mining firm. It is planning to repurchase shares of common stock with the proceeds of a $850 million debt issue. The interest rate on the debt is expected to be 12%. Currently, BHP is unlevered with 100,000,000 common shares outstanding. The price-earnings ratio of the common shares is 4, and the pre-tax operating income is $1 billion. The equity has a required rate of return of 25% based on an equity beta of 1.45. Assuming the company's tax rate is 35% (), the personal interest income tax rate is 10% , and there is no personal tax on equity holders. All cash flows are perpetuities. Answer the following questions:

 

a)    Compute the company's earnings per share, stock price and market value before the debt issue and stock repurchase

b)    Assume BHP repurchases its outstanding shares at the current price (which you have calculated in a). Compute the company's EPS and stock price after the debt issue and stock repurchase.