Consider a world with no taxes and perfect capital markets. The WW Corporation is currently all equity financed. Its earnings are $10M per year and will stay that way in perpetuity. The value of the firm is $120M. The firm is considering issuing risk-free debt worth $50M and maturing in 10 years at an interest rate of 6% and using it to repurchase $50M of equity.

1. What would be the total value of firm be after the refinancing?

2. What would be the return on equity be after the refinancing?

3. Ivan owns $1.5M of the stock of WW before the refinancing. By how much would his total lending or borrowing change when the firm refinances assuming he wants the same returns both before and after? What is the new value of his stock in WW?

4. How would your answer be different if there were a corporate tax with interest deductibility and the corporate tax rate was 40%? How much better off would Ivan be?