Question

Taco Salad Manufacturing, Inc., plans to announce that it will issue $2.11 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 9 percent. The company is currently all-equity and worth $6.58 million with 194,000 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 $1.35 million are expected to remain constant in perpetuity. The tax rate is 25 percent.

a. What is the expected return on the company’s 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.)

c. What is the company’s 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.)

Answer 1

a.The expected return on the company’s equity before the announcement of the debt issue is

b.The price per share of the company's equity is $33.92 per share.

c.The company’s stock price per share immediately after the repurchase announcement is $36.64 per share.

For Detailed solution refer the sheet uploaded:-->