Problem:
Poulsbo Manufacturing, ZInc. is currently an all-equity firm that pays no taxes. The market value of the firm's equity is $4 million. The cost of this unlevered equity is 15 percent per annum. Poulsbo plans to issue $700,500 in debt and use the proceeds to repurchase stock. The cost of debt is 4 percent semi-annually.
A. After Poulsbo repurchases the stock, what will the firm's weighted average cost of capital be?
B. After the repurchase, what will the cost of equity be? Explain.
C. Using the Modigliani-Miller Proposition 2, what will be the weighted average of cost of capital after the repurchase.