Pls do all parts or skip it. Thanks I will like. Problem 24. Stock Value and Leverage Green manufacturing plan to announce that it will issue $2 million perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 6 percent. Green is currently an all-equity firm worth $6.3 million with 400,000 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 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 repurchase announcement? 5). How many shares will Green repurchase as a result of debt issue? How many shares of common stock will remain after repurchase? 6). Construct the market value balance sheet after restructuring. 7). What is the required return on Green’s equity after restructuring?.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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