Lecture18b_winter09

Lecture18b_winter09 - CAPITAL STRUCTURE AND VALUE OF THE...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
CAPITAL STRUCTURE AND VALUE OF THE FIRM
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
EXAMPLE Green Manufacturing plans to announce that it will issue $2m in perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a 6% annual coupon rate. Green is currently an all-equity firm, worth $10m with 0.5m shares. After the sale of the bonds, Green will maintain the new capital structure indefinitely. Green currently generates annual pretax earnings of $1.5m. This is supposed to continue in perpetuity and the tax rate is 40%
Background image of page 2
EXAMPLE You may think the new structure will be Debt $2m and Equity $8m, but that will not happen. You may think that the proceeds from the bond issue will buy 100,000 shares, but that will not happen.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
EXAMPLE a) What is the expected return on Green’s equity before the announcement? b) What is Green’s market value balance sheet before the announcement? What is the price per share? c) Construct Green’s market value balance sheet after the announcement? d) What is the price share after the announcement?
Background image of page 4
e) How many shares will Green repurchase? f) Construct the market value balance sheet
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/28/2012 for the course ECON 134a taught by Professor Lim during the Winter '08 term at UCSB.

Page1 / 19

Lecture18b_winter09 - CAPITAL STRUCTURE AND VALUE OF THE...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online