Dickson, Inc., plans to announce that it will repurchase its own common stock by the proceeds from the $1.8 million of perpetual debt issuance. The bonds will sell at par with a coupon rate of 6 percent. Dickson is currently an all-equity company worth $5.9 million with 350,000 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 $1.35 million. There is no depreciation. This level of earnings is expected to remain constant in perpetuity. The tax rate is 40 percent.

What is the expected return on the companys equity before the announcement of the debt issue?

Construct the companys market value balance sheet before the announcement of the debt issue. What is the price per share of the firms equity?

Construct the companys market value balance sheet immediately after the announcement of the debt issue.

What is the companys stock price per share immediately after the repurchase announcement?

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?

Construct the market value balance sheet after the restructuring.

What is the required return on the companys equity after the restructuring?

Comparing your answers in 4a and 4g, explain why the cost of equity will be changed after restructuring?