Warsaw Manufacturing, Incorporated, plans to announce that it will issue $2.05 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. The company is currently all-equity and worth $6.52 million with 188,000 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 $1.29 million are expected to remain constant in perpetuity. The tax rate is 22 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.) d. 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.) e-1. How many shares will the company repurchase as a result of the debt issue? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) e-2. How many shares of common stock will remain after the repurchase? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) g. What is the required return on the company’s equity after the restructuring? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Warsaw Manufacturing, Incorporated, plans to announce that it will issue $2.05 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. The company is currently all-equity and worth $6.52 million with 188,000 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 $1.29 million are expected to remain constant in perpetuity. The tax rate is 22 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.) d. 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.) e-1. How many shares will the company repurchase as a result of the debt issue? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) e-2. How many shares of common stock will remain after the repurchase? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) g. What is the required return on the company’s equity after the restructuring? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
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Warsaw Manufacturing, Incorporated, plans to announce that it will issue $2.05 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. The company is currently all-equity and worth $6.52 million with 188,000 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 $1.29 million are expected to remain constant in perpetuity. The tax rate is 22 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.) |
| d. | 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.) |
| e-1. | How many shares will the company repurchase as a result of the debt issue? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| e-2. | How many shares of common stock will remain after the repurchase? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| g. | What is the required return on the company’s equity after the restructuring? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
Transcribed Image Text:### Financial Metrics Table
This table provides placeholders for key financial metrics related to stock performance. Below is a transcription and explanation of each component:
1. **a. Expected return**: A measure that indicates the percentage of potential profit or loss an investor anticipates on an investment.
2. **b. Price per share**: The current market value of a single share of stock.
3. **d. New share price**: The projected or updated price of a share after certain financial activities, like stock buybacks or splits.
4. **e-1. Shares repurchased**: The number of shares a company buys back from the investors.
5. **e-2. New shares outstanding**: The updated number of total shares available after repurchases or additional offerings.
6. **g. Required return**: The minimum percentage of return investors expect to earn from an investment, based on its risk level.
Both the "Expected return" and "Required return" rows have percentage signs indicating these are expressed as percentages. The table provides a structured format for inputting or analyzing these values but does not contain data directly.
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VIEWStep 4: d) What is the company’s stock price per share immediately after the repurchase announcement?
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Transcribed Image Text:This table presents financial metrics related to stock evaluation:
- **a. Expected return:** 15.43%
- **b. Price per share:** $34.68
- **d. New share price:** $37.08
- **e-1. Shares repurchased:** (value not given)
- **e-2. New shares outstanding:** (value not given)
- **g. Required return:** (percentage not specified)
The table lacks specific values for shares repurchased, new shares outstanding, and required return, which are essential for a complete financial analysis.
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