Question

ryan inc. plans to announce that it will issue $2.09 million of perpetual debt and use the proceeds to repurchase common stock. the bonds will sell at par with a 6 percent annual coupon rate. ryan is currently an all-equity firm worth $7.94 million with 490,000 shares of common stock outstanding. after the sale of the bonds, ryan will maintain the new capital structure indefinitely. ryan currently generates annual pre-tax earnings of $1.59 million. this level of earnings is expected to remain constant in perpetuity. ryan is subject to a corporate tax rate of 40 percent. what is the required return on ryan's equity after the restructuring?

Answer 1

To calculate the required return on Ryan's equity after the restructuring, we need to calculate the weighted average cost of capital (WACC). WACC is the average rate of return that a company must earn on its existing assets to satisfy its creditors, shareholders, and other stakeholders.

Step-by-step explanation:

In order to calculate the required return on Ryan's equity after the restructuring, we can use the weighted average cost of capital (WACC) formula. WACC is the average rate of return that a company must earn on its existing assets to satisfy its creditors, shareholders, and other stakeholders. It is calculated by finding the weighted average of the cost of debt and the cost of equity, based on the market value of each component.

In this case, after the restructuring, Ryan will have $2.09 million of debt and $7.94 million of equity. The cost of debt can be calculated using the coupon rate, tax rate, and market value of the debt. The cost of equity can be determined using the earnings of the company and the market value of the equity. Plugging in the values, we can calculate the WACC and use it as the required return on Ryan's equity after the restructuring.

WACC = (Cost of Debt * Weight of Debt) + (Cost of Equity * Weight of Equity)