XYZ Inc. is currently funded with equity that consists of 100,000 shares trading at a price of $20 per share and $1 million of perpetual debt (par value equals market value) carrying annual interest payments at a rate of 5% (likewise, coupon equals cost of debt). XYZ would like to issue an additional $500,000 of perpetual debt with the same interest rate to buy back equity. If the tax rate is 40%, construct the market value balance sheets before and after the announcement to calculate the number of outstanding shares after this exercise is completed.

Construct the starting and at least one more market value balance sheet (during the process) to illustrate your calculation.

Make the usual assumptions of perfect / efficient markets with corporate tax to evaluate the value implications.

Please show calculations, thank you!