Green Manufacturing, Inc., plans to announce that it will issue $3 mil

QUESTION

Green Manufacturing, Inc., plans to announce that it will issue $3 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a 6 percent annual coupon rate. Green is currently an al-equity firm worth $9.5 Million with 600,000 shares of common stock ou
a. Expected Return = Pretax earning(1- tax)/Total equity Expected Return = $1.8 million(1-.40)/$9.5 million = 11.37% b. Balance sheet Assets $9,500,000 Debt $0 Equity $9,500,000 Total $9,500,000 Total $9,500,000 Price per share = Equity/common shares = $9,500,000/600,000 = $15.83 c. Balance sheet Assets $9,500,000 Debt $0 PV of tax shield $1,200,000 Equity $10,700,000 Total $10,700,000 Total $10,700,000 PV of tax shield = $3,000,000(debt) * .40(tax) =$1,200,000 d. Price per share = Equity/common shares = $10,700,000/600,000 = $17.83 e.

res = Total debt/price per share = $3,000,000/$17.83 =168224 shares common stock will remain after the purchase =600,000 168224 = 431,776 f. Balance sheet Assets $9,500,000 Debt $3,000,000 PV of tax shield $1,200,000 Equity $7,700,000 Total $10,700,000 Total $10,700,000 g. Rs = Re B/S (Re -Rb)(1-tax) Rs = 11.37% $3,000,000/$7,700,000 (11.37%-6%)(1-.40)= 12.63%

ANSWER:

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