Green Manufacturing is an all equity firm with a current market value of $10,000,000 and 500,000 shares outstanding. Green plans to announce that it will issue $2,000,000 of perpetual bonds and use these funds to repurchase equity. The bonds will have a 6-percent coupon rate.
After the sale of the bonds and the share repurchase, Green will maintain the new capital structure indefinitely. The corporate tax rate for Green is 40% and there are no personal taxes.
a. What will the stock price be immediately after Green announces its plan to issue bonds and repurchase equity?
b. What will the total market value of the firm's equity be immediately after Green announces its plan to issue bonds and repurchase equity?
c. How many shares will Green repurchase?
d. What will be the market value of Green's equity after the bond issue and share repurchase are completed?