Overnight Publishing Company (OPC) has Rs2 million in excess cash. The firm plans to use this cash either to retire all of its outstanding debt or to repurchase equity. The firms debt is held by one institution that is willing to sell its back to OPC for Rs2 million. The institution will not charge OPC any transaction costs. Once OPC becomes an all-equity firm, it will remain unlevered forever. If OPC does not retire the debt, the company will use the Rs2 million in cash to buy back some of its stock on the open market. Repurchasing stock also has no transaction costs. The company will generates Rs11,00,000 of annual earnings before interest and taxes in perpetuity regardless of its capital structure. The firm immediately pays out all earnings as dividends at the end of each year. OPC is subject to a corporate tax rate of 35 per cent, and the required rate of return on the firms unlevered equity (r_o) is 20 per cent. The personal tax rate on interest income (T_B) is 25 per cent and the personal tax rate on equity distribution (T_s) is 10 per cent. Ignore bankruptcy costs.

A) What is the value of OPC if it chooses to retire all of its debt and becomes an unlevered firm?

B) What is the value of OPC if it decides to repurchase stock instead of retire its debt?