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GMT Manufacturing, Inc., plans to announce that it will issue Br. 2 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. GMT is currently an all-equity firm worth Br. 10 million with 500,000 shares of common stock outstanding. After the sale of the bonds, GMT will maintain the new capital structure indefinitely. GMT currently generates annual pretax earnings of Br. 1.5 million. This level of earnings is expected to remain constant in perpetuity. GMT is subject to a corporate tax rate of 40 percent.
Question a. What is the expected return on GMT's equity before the announcement of the debt issue?
Question b. What is the price per share of the firm's equity?
Question c. What is GMT's market value and stock price per share immediately after the repurchase announcement?
Question d. How many shares will GMT repurchase as a result of the debt issue?
Question e. What is the required return on GMT's equity after the restructuring?
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