Green Manufacturing Financial Analysis
Green Manufacturing, Inc., plans to announce that it will issue $2 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will have a 6-percent annual coupon rate. Green is currently an all-equity firm worth $10 million with 500,000 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 $1.5 million. This level of earnings is expected to remain constant in perpetuity. Green is subject to a corporate tax rate of 40 percent.
1.What is the expected return on Green's equity before the announcement of the debt issue?
2.Construct Green's market-value balance sheet before the announcement of the debt issue. What is the price per share of the firm's equity?
3.Construct Green's market-value balance sheet immediately after the announcement of the debt issue.
4.What is Green's stock price per share immediately after the repurchase announcement?
5.How many shares will Green repurchase as a result of the debt issue? How many shares of common stock will remain after the repurchase?
6.Construct the market-value balance sheet after the restructuring. What is Green's stock price per share after the restructuring?
7.What is the required return on Green's equity after the restructuring?