Texas Energy is financed solely by common stock and has outstanding 70 million shares

with a market price of $30 a share. It now announces that it intends to issue $500 million of

debt and use the proceeds to pay a dividend to the stockholders. The managers of Texas

energy plan to keep the same level of debt forever. The corporate tax is 21%. Ignore

personal taxes, bankruptcy, and agency problems. The firm is highly profitable.

a. What is the total market value of the firm: equity plus debt, with the new capital

structure?

b. What is the market price of the stock (price per share) with the new capital structure?

c. Suppose that instead of using debt to pay a dividend, the firm uses the debt to buy back

stock. What is the value of the firm? How many shares are outstanding? What is the

price per share?

d. What are the main differences (if any) for the firm between buy backs and dividend

payments in this question?