Suppose you have a company, which, starting next year, will either generate $ 200 every year forever, or $ 100 every year forever (with equal probability). Assume no systematic risk; r_f is 10%. All uncertainty will be resolved at date 1.

Suppose now this company issues perpetual debt with a face value of $ 1500 and a 10% coupon. That means that the company promises to pay $ 150 in interest payments every year; if it fails to pay this debt service, the bondholders get to seize the company. If the bondholders seize the company, they get all cash flows forever. [Definition: Face value of the debt is what you promise to repay (or base interest payments on). It is not the same thing as market value].

If the company is initially all-equity, and then announces (at date 0) that it will issue this level of debt and use the proceeds to repurchase shares, what will happen be the value of the firm (at date 0)? Assume no taxes.