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MM-Proposition 2
Poulsbo Manufacturing, Inc. is currently an all-equity firm that pays no taxes. The market value of the firms 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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