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?
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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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What is required return on Green's equity after the restructuring?
Transcribed Image Text: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?
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