Problem:
Buckeye Corp. is currently an all equity firm with a market value of equity of $100 million. The current expected return on Buckeyes 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 corporte or personal taxes.
Please answer the following question:
Question 1: After Buckeye repurchases the stock, what will the expected return on the firms stock?
Question 2: After Buckeye repurchases the stock, what will be the firm's weighted average cost of capital?
Note: Please show how you came up with the solution.