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?© BrainMass Inc. brainmass.com June 3, 2020, 6:29 pm ad1c9bdddf
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. ...
You will find the answer to this puzzling assignment inside...