Hello,

I am completely stuck at the question 4. It would be really helpful if you could explain me how I should resolve it.

Please find the photo attached.

4. (7 points) Oxydon Inc. plans to announce that it will issue $2,000,000 of perpetual bonds.

The bonds will have a 6-percent coupon rate. Oxydon currently is an all-equity firm. The

value of Oxydon's equity is $10,000,000 and there are 500,000 shares outstanding. After

the sale of the bonds, Oxydon will maintain the new capital structure indefinitely. The

expected annual pretax earnings of Oxydon are $1,500,000. Those earnings are also

expected to remain constant into the foreseeable future. Oxydon is in the 40-percent tax

bracket.

a. What is Oxydon's current overall required return?

b. Construct Oxydon's market-value balance sheet as it looks before the

announcement of the debt issue.

c. What is the market-value balance sheet after the announcement?

d. How many shares of stock will Oxydon retire?

e. What will the accounts show after the restructuring has taken place?

f. What is Oxydon's cost of equity after the capital restructuring?

Best regards,