Question: Rayburn Manufacturing is currently an all-equity firm. The firm's equity is worth $2 million. The cost of that equity is 18 percent. Rayburn pays no taxes. Rayburn plans to issue $400,000 in debt and to use the proceeds to repurchase stock. The cost of debt is 10 percent.
1) After rayburn repurchases the stock, what will the firm's overall cost of capital be?
2) After the repurchase, what will the cost of equity be?
3) Explain your result in (b).