Martin Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result,the firms debt equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $4 million worth of debt outstanding. The cost of this debt is 9 percent per year. The firm expects to have an EBIT of $1.39 million per year in perpetuity and pays no taxes
a) What is the market value of the firm before and after the repurchase announcement? (Do not round intermediate calculations and round final answer to nearest whole dollar)
Before $
After $
b) What is the expected return on the firms equity before the announcment of the stock repurchase plan? (Do not round intermediate calculations and enter final answer as percent rounded to 2 decimal places)
Expected Return %
c) What is the expected return on the equity of an otherwise identical all equity firm? (Do not round intermediate calculations and enter final answer as a percent rounded 2 decimal places)
Expected Return %
d) What is the expected return on the firms equity after the announcement of the stock repurchase plan? (do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places)
Expected return %
Martin Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result,the firms debt equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $4 million worth of debt outstanding. The cost of this debt is 9 percent per year. The firm expects to have an EBIT of $1.39 million per year in perpetuity and pays no taxes
a) What is the market value of the firm before and after the repurchase announcement? (Do not round intermediate calculations and round final answer to nearest whole dollar)
Before $
After $
b) What is the expected return on the firms equity before the announcment of the stock repurchase plan? (Do not round intermediate calculations and enter final answer as percent rounded to 2 decimal places)
Expected Return %
c) What is the expected return on the equity of an otherwise identical all equity firm? (Do not round intermediate calculations and enter final answer as a percent rounded 2 decimal places)
Expected Return %
d) What is the expected return on the firms equity after the announcement of the stock repurchase plan? (do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places)
Expected return %
Related questions
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 | % |
