Green Manufacturing, Inc., plans to announce that it will issue$5 million of perpetual debt and use the proceeds to repurchasecommon stock. The bonds will sell at par with a 2 percent annualcoupon rate. Green is currently an all-equity firm worth $16Million with 800,000 shares of common stock outstanding. After thesale of bonds, Green will maintain the new capital structureindefinitely. Green currently generates annual pretax earnings of$4 million. This level of earnings is expected to remain constantin perpetuity. Green is subject to a corporate tax rate of 48percent.

a. What is the expected return on Greens's equity before theannouncement of the debt issue?

b. Construct Green's market value balance sheet before theannouncement of the debt issue. What is the price per share of thefirm's equity?

c. Construct Green's market value balance sheet immediatelyafter the announcement of the debt issue.

d.What is Green's stock price per share immediately after therepurchase announcement?

e. How many shares will Green repurchase as a result of the debtissue? How many shares of common stock will remain after therepurchase?

f. Construct the market value balance sheet after therestructuring.

g. What is the required return on Green's equity after therestructuring?