Question:Green Manufacturing, Inc., plans toannounce that it will issue $2.06 millionof perpetual debt and use the proceedsto repurchase common stock. The bondswill sell at par with a coupon rate of 6percent. Green is currently an all-equityfirm worth $7.38 million with 460,000shares of common stock outstanding.After the sale of the bonds, Green willmaintain the new capital structureindefinitely. Green currently generatesannual pretax earnings of $1.56 million.This level of earnings is expected toremain constant in perpetuity. Green issubject to a corporate tax rate of 40percent. What is the required return onGreen's equity after the restructuring?

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Answered: Question: Green Manufacturing, Inc.,…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On April 1, 2014, Fredriksen Corp. sold a $700 million bond issue to finance the purchase of a new distribution facility. These bonds were issued in $1,000 denominations with a maturity date of April 1, 2034. The bonds have a coupon rate of 8.00% with interest paid semiannually. Required: a) Determine the value today April 1, 2024 of one of these bonds to an investor who requires a 12 percent return on these bonds. Why is the value today different from the par value? b) Assume that the bonds are selling for $925.00. Determine the current yield and the yield-to-maturity. Explain what these terms mean. c) Explain what layers or textures of risk play a role in the determination of the required rate of return on Fredriksen's bonds.
Howell Corporation is interested in acquiring Burns Industries. Burns has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.55 (given its target capital structure). Burns has $8.33 million in debt that trades at par and pays a 7% interest rate. Burns’ free cash flow (FCF0) is $1 million per year and is expected to grow at a constant rate of 5% a year. Burns pays a 25% combined federal-plus-state tax rate, the same rate paid by Howell. The risk-free rate of interest is 6%, and the market risk premium is 7%. Hasting’s first step is to estimate the current intrinsic value of Burns. A. What is Burns’ cost of equity? Do not round intermediate calculations. Round to two decimal places. _______% B. What is its weighted average cost of capital? Do not round intermediate calculations. Round to two decimal places. ________% C. What is Burns’ intrinsic value of operations? Do not round intermediate calculations. Round to two decimal places.…
Cotton On Ltd. currently has the following capital structure:Debt: $3,500,000 par value of outstanding bond that pays annually 10% coupon rate with an annualbefore-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20years.Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each shareis $100. The firm plan just paid a $8.50 dividend per share. The firm is maintaining 4% annual growthrate in dividends, which is expected to continue indefinitely.Preferred shares: 45,000 outstanding preferred shares with face value of $100, paying fixed dividendrate of 12%.The firm's marginal tax rate is 30Calculate the current price of the preferred share if the average return of the shares in the sameindustry is 10%
Cotton On Ltd. currently has the following capital structure: Debt: $3,500,000 par value of the outstanding bond that pays annually 10% coupon rate with an annual before-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20 years. Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each share is $100. The firm plan just paid an $8.50 dividend per share. The firm is maintaining 4% annual growth rate in dividends, which is expected to continue indefinitely. Preferred shares: 45,000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 12%. The firm's marginal tax rate is 30%. Required: Calculate the current price of the preferred share if the average return of the shares in the same industry is 10%
Cotton On Ltd. currently has the following capital structure:Debt: $3,500,000 par value of outstanding bond that pays annually 10% coupon rate with an annual before-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20 years.Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each shareis $100. The firm plan just paid a $8.50 dividend per share. The firm is maintaining 4% annual growthrate in dividends, which is expected to continue indefinitely.Preferred shares: 45,000 outstanding preferred shares with face value of $100, paying fixed dividendrate of 12%.The firm's marginal tax rate is 30%.Required:a) Calculate the current price of the corporate bond? b) Calculate the current price of the ordinary share if the average return of the shares in the sameindustry is 9%? c) Calculate the current price of the preferred share if the average return of the shares in the sameindustry is 10%
Suppose GENERAL MILLS issued 1,250,000 bonds with the par value of $1000 and a coupon rate of 3.8% on June 1, 2021. The bonds include semi-annual coupon payments and are due on May 31, 2031. If the effective interest rate at issuance was 4%, how much capital was the Company able to raise? (in millions; Round your answer to the two decimal places.)
On November 10, 2022, the total market value of company “BellaLimited” is $49 million dollars. In the beginning of the year, the company issued a ten-year bond with a coupon rate of 12% that iscurrently trading at 1,125 dollars. The market ongoing rate ofinterest/discount rate is 8%. The CEO of the company isconsidering undertaking two solar projects namely, project“Lambda” that has a cost of $15,000 and is expected to producebenefits (e.g., cash flows) of $5,000 per year for five years andproject “EPSILON” that costs $24,000 and is expected to produce cash flows of $6,500 per year for five years. a. Calculate the two projects Internal Rate of Return and ProfitabilityIndices. b. Which project would be selected, assuming that are MutuallyExclusive, using each ranking method? c. Discuss in detail the advantages and disadvantages of the IRRcriterion. d. Which ranking criterion is better IRR or NPV? Carefully explainyour answer.

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