Octagon, Inc. (OI) has a perpetual EBIT of $400 million, zero debt and 100 million shares outstanding. Assume it is currently the beginning of the year but that the income will be first realized at the end of the year and will repeat annually forever thereafter. In addition, assume taxes are also paid at the end of the year. Assume that the corporate tax rate is 40%, and the risk-free rate of return is 4.0%

Part (a) What is the value of the firm? What is its stock price?

Part B. Now suppose the firm issues a perpetual debt with an annual interest payment of $100m. What is the opportunity cost of debt? How much financing does the firm receive from the debt issue (i.e. what is the debt's market value)

Part C. What is the value of the firm's equity once it has issued the debt? (Hint: you might want to calculate first the cash flows accruing to equityholders in every year)

Part D. What is the value of the firm once it has issued the debt? Does the value of the firm change? Explain why or why not.