14)
Green Manufacturing, Inc., plans to announce that it will issue $1.91 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 7 percent. Green is currently an all-equity firm worth $4.74 million with 310,000 shares of common stock outstanding. After the sale of the bonds, Green will maintain the new capital structure indefinitely. Green currently generates annual pretax earnings of $1.41 million. This level of earnings is expected to remain constant in perpetuity. Green is subject to a corporate tax rate of 30 percent.
a. What is the expected return on Greenâs equity before the announcement of the debt issue? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)
Expected return %
b. What is the price per share of the firmâs equity? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)
Price per share $
c. What is Greenâs stock price per share immediately after the repurchase announcement? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)
New share price $
d-1. How many shares will Green repurchase as a result of the debt issue? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)
Shares repurchased
d-2. How many shares of common stock will remain after the repurchase? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)
New shares outstanding
e. What is the required return on Greenâs equity after the restructuring? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)
Required return %
14)
| Green Manufacturing, Inc., plans to announce that it will issue $1.91 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 7 percent. Green is currently an all-equity firm worth $4.74 million with 310,000 shares of common stock outstanding. After the sale of the bonds, Green will maintain the new capital structure indefinitely. Green currently generates annual pretax earnings of $1.41 million. This level of earnings is expected to remain constant in perpetuity. Green is subject to a corporate tax rate of 30 percent. |
| a. | What is the expected return on Greenâs equity before the announcement of the debt issue? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) |
| Expected return | % |
| b. | What is the price per share of the firmâs equity? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).) |
| Price per share | $ |
| c. | What is Greenâs stock price per share immediately after the repurchase announcement? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).) |
| New share price | $ |
| d-1. | How many shares will Green repurchase as a result of the debt issue? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).) |
| Shares repurchased |
| d-2. | How many shares of common stock will remain after the repurchase? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).) |
| New shares outstanding |
| e. | What is the required return on Greenâs equity after the restructuring? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) |
| Required return | % |
Related questions
| Vedder, Inc., has 6.4 million shares of common stock outstanding. The current share price is $61.40, and the book value per share is $4.40. Vedder also has two bond issues outstanding. The first bond issue has a face value of $70.4 million, a coupon rate of 7.4 percent, and sells for 96 percent of par. The second issue has a face value of $35.4 million, a coupon rate of 6.9 percent, and sells for 95 percent of par. The first issue matures in 18 years, the second in 10 years. The most recent dividend was $3.05 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 40 percent. |
| Required: |
| What is the companyâs cost of equity? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
| Cost of equity | % |
| What is the companyâs aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
| Aftertax cost of debt | % |
| What is the companyâs equity weight? (Do not round intermediate calculations. Enter your answer rounded to 4 decimal places (e.g., .1632).) |
| Equity weight |
| What is the companyâs weight of debt? (Do not round intermediate calculations. Enter you answer rounded to 4 decimal places (e.g., .1632).) |
| Debt weight |
| What is the companyâs WACC? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
| WACC | % |
