Question
Taco Salad Manufacturing, Inc., plans to announce that it will issue $2.15 million of perpetual debt and use the proceeds to repurchase common stock. The
Taco Salad Manufacturing, Inc., plans to announce that it will issue $2.15 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 6 percent. The company is currently all-equity and worth $6.62 million with 198,000 shares of common stock outstanding. After the sale of the bonds, the company will maintain the new capital structure indefinitely. The annual pretax earnings of $1.39 million are expected to remain constant in perpetuity. The tax rate is 22 percent. |
a. | What is the expected return on the companys equity before the announcement of the debt issue? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
b. | What is the price per share of the company's equity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
d. | What is the companys stock price per share immediately after the repurchase announcement? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
e-1. | How many shares will the company repurchase as a result of the debt issue? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
e-2. | How many shares of common stock will remain after the repurchase? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
g. | What is the required return on the companys equity after the restructuring? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. |
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