Please help with the following problem. Provide step by step calculations.
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.
a. After rayburn repurchases the stock, what will the firm's overall cost of capital be?
b. After the repurchase, what will the cost of equity be?
c. Explain your result in (b).
a. After Rayburn repurchases the stock, what will the firm's overall cost of capital be?
Since there are no tax advantages of debt, the cost of capital before and after the repurchase would remain the same.
Cost of capital before = 18% = Cost of equity (company is an all equity firm)
Afetr repurchase the ...
The solution calculates the firm's overall cost of capital (WACC) and cost of equity after the repurchase of stock. Step by step calculations are given for each problem.