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    Jun 4, 2006, 11:28 AM
    Weighted average cost of capital
    Johnson Inc is an all-equity firm that pays no taxes. The market value of the firm's equity is $2 Million. The cost of this unlevered equity is 18% per annum. Johnson plans to issue $400,000 in debt and use the proceeds to repurchase stock. The cost of debt is 10% per annum.
    a. After Johnson repurchased 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. Use your answer to (b) to compute Johnson's weighted average cost of capital after the repurchase. Is this answer, consistent with (a)?

    Thanks.
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    #2

    Jun 4, 2006, 11:35 AM
    Market value and more
    Acetate's has equity with a market value of $20 million and debt with a market value of $10 million. The cost of debt is 14 percent per annum. Treasury bills that mature in one year yield 8% per annum, and the expected return on the market portfolio over the next year is 18%. The beta of Acetate's equity is 0.9. The firm pays no taxes.
    What is Acetate's debt-equity ratio?
    What is the firm's weighted average cost of capital?
    What is the cost of capital for an otherwise identical all-equity firm?

    Thanks
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