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    Poulsbo Manufacturing, Inc., is currently an all-equity firm that pays no taxes. Calculate firm's weighted average cost of capital, cost of equity and more...

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    Poulsbo Manufacturing, Inc., is currently an all-equity firm that pays no taxes. The market value of the firm's equity is $3 million. The cost of this unlevered equity is 15% per annum.

    Poulsbo plans to issue $600,000 in debt and use the proceeds to repurchase stock.
    The cost of debt is 4% 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 MM-Proposition 2, what will be the weighted average cost of capital after the repurchase?

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    https://brainmass.com/business/weighted-average-cost-of-capital/62192

    Solution Preview

    A) According to MMI the value of firm remains unchanged irrespective of the leverage.
    The debt equity ratio is 0.6/3.0 or 20%.
    That will change the WACC. ...

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