Case Situation:
Poulsbo Manufacturing, Inc. (Adair Imaging) 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 percent annum. Poulsbo plans to issue 600000 in debt and use the proceeds to repurchase stock. The cost of debt is 4% semi annually.
Required to do:
1) After Poulsbo repurchases the stock, what will the firm's weighted average cost of capital be?
2) After the repurchase, what will the cost of equity be? Explain.
3) Using MM-Proposition 2, what will be the weighted average cost of capital after the repurchase?