The ski and winter sports equipment company Tomba La Bomba Co. (TLB) currently has no debt. The firms earnings are USD 3,200 per year and are expected to continue forever at this level (all figures in USD thousands). The expected return on assets is 16% and there are 2000 shares outstanding. Assume that personal or corporate taxes are zero. Suppose TLB issues debt at par with total annual coupon payments of USD 1,350. The bonds are consols, i.e., they pay interest into perpetuity, and carry an annual coupon of rate 11.25%. The firm intends to repurchase existing shares with the proceeds of the bond issue.

1. (a) What is the value of TLB before the debt offering?

2. (b) How many shares are repurchased when the proceeds from the debt offering are used?

3. (c) What is the expected return on equity to TLB shareholders after the debt offering?

4. (d) Now suppose that TLB pays corporate taxes of 34% (personal taxes are still assumed to be zero). What is the value of TLB with the introduction of corporate taxes? (i.e. what is the value of the levered firm with corporate taxes?)