Green Manufacturing is an all eq

uity firm with a current ma

rket value of $20,000,000

and 500,000 shares outstanding. The c

urrent expected return on

the firm's stock is 20%.

Green plans to announce that it will issue $2,000,000 of perpet

ual bonds and use these

funds to repurchase equity. The bonds will have a 6% interest

rate. After the sale of the

bonds and the share repurchase, Green will maintain the new cap

ital structure

indefinitely. The corporate tax

rate for Green is 30% and ther

e are no personal taxes.

(a) What will the stock price be immediately after Green annou

nces its plan to issue

bonds and repurchase equity?

(b) What will the total market value of the firm's equity be im

mediately after Green

announces its plan to issue bonds and repurchase equity?

(c) How many shares will Green repurchase?

(d) What will be the market valu

e of Green's equity after the b

ond issue and share

repurchase are completed?

(e) What was Green's weighted ave

rage cost of capital before th

e change in capital

structure?

(f) What is Green's weighted ave

rage cost of cap

ital after the

change in capit

al structure?