Green Manufacturing, Inc., plans to announce that it will issue $1.6 million of perpetual debt and use

Question:

Green Manufacturing, Inc., plans to announce that it will issue $1.6 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with an annual coupon rate of 6 percent. The company is currently an all-equity firm worth $7.7 million with 260,000 shares of common stock outstanding. After the sale of the bonds, the company will maintain the new capital structure indefinitely. The company currently generates annual pretax earnings of $1.86 million. This level of earnings is expected to remain constant in perpetuity. The corporate tax rate is 40 percent.
a. What is the expected return on equity before the announcement of the debt issue?
b. Construct the market value balance sheet before the announcement of the debt issue. What is the price per share of the firm’s equity?
c. Construct the market value balance sheet immediately after the announcement of the debt issue.
d. What is the stock price per share immediately after the repurchase announcement?
e. How many shares will the company repurchase as a result of the debt issue? How many shares of common stock will remain after the repurchase?
f. Construct the market value balance sheet after the restructuring.
g. What is the required return on the company’s equity after the restructuring?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...