Question

Green Manufacturing, Inc., plans to announce that it will issue $6 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a 3 percent annual coupon rate. Green is currently an all-equity firm worth $14 million with 900,000 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 $5 million. This level of earnings is expected to remain constant in perpetuity. Green is subject to a corporate tax rate of 44 percent. (Unless otherwise noted, round your answers to 2 decimal places. (e.g., 0.16))

	a. The expected return on Green's market value of equity before the announcement of the debt issue is  percent.
	b. Construct Green's market value balance sheet before the announcement of the debt issue. (Round your answers to the nearest dollar (e.g., 351)) Market Value Balance Sheet           Debt $         Assets $         Equity $         Total assets $         Total D & E $       The price per share of the firm's equity is $
	c. Construct Green's market value balance sheet immediately after the announcement of the debt issue. (Round your answers to the nearest dollar (e.g., 351)) Market Value Balance Sheet   Old assets $         Debt $         PV(tax shield)         $         Equity $         Total assets $         Total D & E $
	d. Green's stock price per share immediately after the repurchase announcement is $  .

    
     e. Green will repurchase  shares as a result of the debt issue. There are  remaining shares after the repurchase.

     f. Construct the market value balance sheet after the restructuring. (Round your answers to the nearest dollar (e.g., 351))

Market Value Balance Sheet
Old assets	$	Debt	$
PV(tax shield)	$	Equity	$
Total assets	$	Total D & E	$

    g. The required return on Green's equity after the restructuring is  percent.

Answer 1

a)	After tax earnings of the unlevered firm = 5000000*(1-44%) =	2800000
	Expected return on market value of equity before the announcement = 2800000/14000000 =	20.00%
b)	Market value balance sheet before announcement:
			Debt	0
	Assets	14000000	Equity	14000000
	Total assets	14000000	Total liabilities and equity	14000000
	The price per share of the firms equity = 14000000/900000 =	$             15.56
c)	MV Balance sheet immediately after announcement:
	Old assets	14000000	Debt
	PV (Tax shield on debt) = 6000000*44% =	2640000	Equity	16640000
	Total assets	16640000	Total liabilities and equity	16640000
d)	The stock price immediately after the announcement = 16640000/900000 =	$             18.49
e)	Number of shares repurchased = 6000000/18.49 =	324500
	Number of shares outstanding after the repurchase = 900000-324500 =	575500
	Price of the share after restructuring = 10640000/575500 =	$             18.49
f)	MV Balance sheet after restructuring:
	Old assets	14000000	Debt	6000000
	PV (Tax shield on debt) = 6000000*44% =	2640000	Equity	10640000
	Total assets	16640000	Total liabilities and equity	16640000
	Value of equity = Value of firm - Value of debt = 16640000-6000000 =	10640000
g)	Required return on Green's equity after restructuring = (5000000-6000000*3%)*(1-44%)/10640000 =	25.37%
	Also, required return on levered equity = 20+(20-3)*56%*600/1064 =	25.37%