Question
Green Manufacturing Inc. plans to announce that it will issue $2 million of perpetual debt and use the proceeds to repurchase common stock. The bonds
Green Manufacturing Inc. plans to announce that it will issue $2 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a 6 percent annual coupon rate. Green is currently an all-equity firm worth $6.3 million with 400,000 shares of common stock outstanding. After the sale of the bonds, Green will maintain the new capital structure indefinitely. Green currently generates annual pre-tax earnings of $1.5 million. This level of earnings is expected to remain constant in perpetuity. Green is subject to a corporate tax rate of 40 percent. (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)
a. What is the expected return on Green's equity before the announcement of the debt issue?
Expected return%?
b. What is the price per share of the firm's equity?
Price$ per share?
d. What is Green's stock price per share immediately after the repurchase announcement?
New share price$?
e-1. How many shares will Green repurchase as a result of the debt issue?
Shares repurchased?
e-2. How many shares of common stock will remain after the repurchase?
New shares outstanding?
g. What is the required return on Green's equity after the restructuring?
Required return %?
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