Consider the following idealized world. There are no corporate or personal taxes. Capital markets are perfect. There are no bankruptcy costs. Individuals and corporations can both borrow at 10 percent. The Woozer Corporation is currently all-equity financed. It has 1 million shares which are each valued at $20. Jack and Jill's current dollar holdings of Woozer shares and their overall borrowing and lending positions are as follows.

Consider the following idealized world. There are no corporate or personal taxes. Capital markets are perfect. There are no bankruptcy costs. Individuals and corporations can both borrow at 10 percent. The Woozer Corporation is currently all-equity financed. It has 1 million shares which are each valued at $20. Jack and Jill's current dollar holdings of Woozer shares and their overall borrowing and lending positions are as follows. $ Value Woozer Shares Total Borrowing (S) Total Lending (S) 5,000 Jack Jill 30,000 75,000 10,000 (a) Suppose Woozer issues debt to repurchase 20 percent of its shares. What would Jack and Jill's new positions be, assuming their initial positions (proportions of debt and equity) were optimal? Give your answer in the same format as the above table. (b) Suppose there was a corporate tax rate of 20 percent: debt interest is tax- deductible for corporate taxes, but dividends are not. Apart from this the model is as above. The firm is initially all equity financed. It then issues $1M of perpetual debt and uses it to repurchase equity. How much does the value of the firm increase? How much do Jack and Jill's total wealth increase assuming their initial positions are as in the table above? Consider the following idealized world. There are no corporate or personal taxes. Capital markets are perfect. There are no bankruptcy costs. Individuals and corporations can both borrow at 10 percent. The Woozer Corporation is currently all-equity financed. It has 1 million shares which are each valued at $20. Jack and Jill's current dollar holdings of Woozer shares and their overall borrowing and lending positions are as follows. $ Value Woozer Shares Total Borrowing (S) Total Lending (S) 5,000 Jack Jill 30,000 75,000 10,000 (a) Suppose Woozer issues debt to repurchase 20 percent of its shares. What would Jack and Jill's new positions be, assuming their initial positions (proportions of debt and equity) were optimal? Give your answer in the same format as the above table. (b) Suppose there was a corporate tax rate of 20 percent: debt interest is tax- deductible for corporate taxes, but dividends are not. Apart from this the model is as above. The firm is initially all equity financed. It then issues $1M of perpetual debt and uses it to repurchase equity. How much does the value of the firm increase? How much do Jack and Jill's total wealth increase assuming their initial positions are as in the table above