Buckeye Corp. is currently an all-equity firm with a market value of equity of $100 million. The current expected return on Buckeye''s equity is 25%. Buckeye operates in a world with no taxes. Buckeye is planning on issuing $10 million in debt with an interest rate of 10% and using the cash to repurchase $10 million in shares. There are no corporate or personal taxes.
(a) After Buckeye repurchases the stock, what will be the expected return on the firm''s stock?
(b) After Buckeye repurchases the stock, what will be the firm''s weighted average cost of capital?