Green Manufacturing plc plans to announce that it will issue £2 million of perpetual debt and use the proceeds to repurchase equity. The bonds will sell at par with a 6 per cent annual coupon rate. Green is currently an all-equity firm worth £10 million with 500,000 shares of equity outstanding. After the sale of the bonds, Green will maintain the new capital structure indefinitely. Green currently generates annual pre-tax earnings of €1.5 million. This level of earnings is expected to remain constant in perpetuity.

Green is subject to a corporate tax rate of 28 per cent.

(a) What is the expected return on Green’s equity before the announcement of the debt issue?

(b) Construct Green’s market 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 share price immediately after the repurchase announcement?

(e) How many shares will Green repurchase as a result of the debt issue? How many shares of equity will remain after the repurchase?

(f) Construct the market value balance sheet after the restructuring.

(g) What is the required return on Green’s equity after the restructuring?