1) Green Manufacturing, Inc, plans to announce that it will issue $2 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will have a 6-percent annual coupon rate. Green is currently an all-equity firm worth $10 million with 500,000 shares of common stock outstanding. After the sale of the bonds, Green maintain the new capital structure indefinitely. Green currently generates annual pretax earning of $1.5 million. This level of earning is expected to remain constant in perpetuity. Green is subject to a corporate rate tax rate of 40%.
a. What is the expected return on Green's equity before the announcement of the debt issue?
b. Construct Green's arket-value balance sheet before the announcement of the debt issue. What is the price per share of the firm's equity.
c. Construct Green's market-value balance sheet immediately after the announcement of the debt issue.
d. What is Green's stock price per share immediately after the repurchae announcement?
e. How many shares will Green 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. What is Green's stock price per share after the restructuring?
g. What is the required return of Green's equity after the restructuring?
2) Urich Inc's articles of incorporation authorize the firm to issue 500,000 share of $5.00 par value common stock of which 325,000 shares have been issued. Those shares were sold at an average of 12 percent over par. In the quarter that ended last week, Ulrich earned $26,000 net income; 4 percent of that income was paid as a dividend. Prior to the close of the books, Ulrick had $3,545,000 in retained earnings. The company owns no treasury stock,
a. Create the equity statement for Ulrich.
b. Create a new equity statement that reflects the sale of 25,000 authorized but unissued shares at the price of $4 per
3) 16.2 Steinberg Corporation and Dietrich Corporation are identical firms except that Dietrich is more levered. Both companies will remain in business for one more year.The companies' economists agree that the probability of a recession next year is 20 percent and the probability of a continuation of the current expansion is 80 percent. If the expansion continues, each firm will generate earnings before interest and taxes (EBIT) of $2 million. If a recession occurs, each firm will generate earnings before interest and taxes (EBIT) of $0.8 million. Steinberg's debt obligation requires the firm to pay $750,000 at the end of the year. Dietrich's debt obligation requires the firm to pay $1 million at the end of the year. Neither firm pays taxes. Assume a one-period model, risk neutrality, and an annual discount rate of 15 percent.
a. Assuming there are no costs of bankruptcy, what is the market value of each firms debt and equity?
b. What is the value of each firm?
c. Steinberg's CEO recently stated that Steinberg's value should be than Dietrich's since the firm has less debt, and therefore, less bankruptcy risk. Do you agree or disagree with this statement?
4) Hannon Home Products, Inc, recently issued $430,000 worth of 8 percent convertible debentures. Each convertible bond
has a face value of $1,000. Each convertible bonds can be converted into 28 shares of the firm's common stock
anytime before maturity. The current price of Hannon's common stock is $31.25 per share, and the market value of
each of Hannon's convertible bonds is $1,180. Answer the following questions related to Hannon's convertible bonds:
a. What is the conversion ratio?
b. What is the conversion price?
c. What is the conversion premium?
d. What is the conversion value?
e. If the value of Hannon's common stock increases by $2, what will be conversion value be?
See attached file for full problem description.
Answers questions on repurchase of stock, equity statement, market value of debt and equity, convertible bonds.