Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 16, Problem 24QP
Stock Value and Leverage Green Manufacturing, Inc., plans to announce that it will issue $1.8 million of 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 company worth $5.9 million with 350,000 shares of common stock outstanding. After the sale of the bonds, the company will maintain the new capital structure indefinitely. The company currently generates annual pretax earnings of $1.35 million. This level of earnings is expected to remain constant in perpetuity. The tax rate is 40 percent.
- a. What is the expected return on the company’s equity before the announcement of the debt issue?
- b. Construct the company's market value
balance sheet before the announcement of the debt issue. What is the price per share of the firm’s equity? - c. Construct the company’s market value balance sheet immediately after the announcement of the debt issue.
- d. What is the company’s stock price per share immediately after the repurchase announcement?
- e. How many shares will the company repurchase as a result of the debt issue? How many shares of common stock will remain after the repurchase?
- f. Construct the market value balance sheet after the restructuring.
- g. What is the required return on the company's equity after the restructuring?
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Question:
Green Manufacturing, Inc., plans to
announce that it will issue $2.06 million
of 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 $7.38 million with 460,000
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 $1.56 million.
This level of earnings is expected to
remain constant in perpetuity. Green is
subject to a corporate tax rate of 40
percent. What is the required return on
Green's equity after the restructuring?
Provide Answer
ABC Inc. has a the capital structure shown below.
Liabilities
Stockholders' Equity
$122,099,000
$95,228,000
ABC Inc. will raise additional capital for new projects this year, in the amount of $44,978,000.
The firm believes, however, that a capital structure with 56.25% debt is ideal.
The firm will be able to issue new discount bonds at a price of $909 with a yield-to-maturity of
3%.
Assuming they want to change their capital structure to the new target, how many new bonds
will the firm need to issue?
unur answer to the nearest bond.
Chapter 16 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 16 - MM Assumptions List the three assumptions that lie...Ch. 16 - Prob. 2CQCh. 16 - Prob. 3CQCh. 16 - MM Propositions What is the quirk in the tax code...Ch. 16 - Prob. 5CQCh. 16 - Prob. 6CQCh. 16 - Optimal Capital Structure Is there an easily...Ch. 16 - Financial Leverage Why is the use of debt...Ch. 16 - Homemade Leverage What is homemade leverage?Ch. 16 - Capital Structure Goal What is the basic goal of...
Ch. 16 - Prob. 1QPCh. 16 - EBIT, Taxes, and Leverage Repeat p arts (a) and...Ch. 16 - ROE and Leverage Suppose the company in Problem 1...Ch. 16 - Break-Even EBIT Franklin Corporation is comparing...Ch. 16 - Prob. 5QPCh. 16 - Break-Even EBIT and Leverage Kolby Corp. is...Ch. 16 - Leverage and Stock Value Ignoring taxes in Problem...Ch. 16 - Homemade Leverage Star, Inc., a prominent consumer...Ch. 16 - Homemade Leverage and WACC ABC Co. and XYZ Co. are...Ch. 16 - MM Scarlett Corp. uses no debt. The weighted...Ch. 16 - Prob. 11QPCh. 16 - Calculating WACC Weston Industries has a...Ch. 16 - Prob. 13QPCh. 16 - MM and Taxes Bruce Co. expects its EBIT to be...Ch. 16 - MM and Taxes In Problem 14, what is the cost of...Ch. 16 - MM Proposition I Levered, Inc., and Unlevered,...Ch. 16 - MM Tool Manufacturing bas an expected EBIT of...Ch. 16 - Firm Value Cavo Corporation expects an EBIT of...Ch. 16 - MM Proposition I with Taxes The Dart Company is...Ch. 16 - MM Proposition I without Taxes Alpha Corporation...Ch. 16 - Cost of Capital Acetate, Inc., has equity with a...Ch. 16 - Homemade Leverage The Veblen Company and the...Ch. 16 - MM Propositions Locomotive Corporation is planning...Ch. 16 - Stock Value and Leverage Green Manufacturing,...Ch. 16 - Prob. 25QPCh. 16 - Prob. 26QPCh. 16 - Prob. 27QPCh. 16 - Prob. 28QPCh. 16 - Prob. 29QPCh. 16 - Prob. 30QPCh. 16 - STEPHENSON REAL ESTATE RECAPITALIZATION Stephenson...Ch. 16 - Prob. 2MCCh. 16 - Prob. 3MCCh. 16 - Prob. 4MCCh. 16 - Prob. 5MC
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