The first questions asks us what would be the effects of issuing $2 billion of new debt and using the proceeds to repurchase shares of the book value of MCI's equity, the price per share of MCI's stock, and the earnings per share of MCI's stock. Referring to the chart below, we realize that by accruing debt re-capitalization by issuing a $2 billion debt to purchase $2 billion stock will not affect the firm's cash flow. Based on the assumption of earning before the interest income remains the same, we have determined that the cost of debt will increased by $123 millions due to the interest accrued by the new debt. We get EBT by subtract the interest expenses from EBIT. Then we subtract the tax expenses from EBT will lead us to the new net income, $498 Million. The $2 billion debt divided by the current market price per share will result in a shares buy back of 72 million shares.
Furthermore, the outstanding shares should be using the original outstanding shares minus the buy back shares. New EPS equals the new net income divided by the new shares outstanding. The new Long-term debt increase from $3,444 million to $5,444 million and therefore, the new book value of equity is $ 9,602 Million minus $2 billion.