An all equity firm pays not taxes, the market value of the firms
equity is 2 million, The cost of the unlevered equity is 18 percent
per annun. If the company plans to issue $400,000 in debt and use the
proceeds to repurchase stock. The cost of debt is 10 percent. After
repurchase what is the WACC of capital be? What is the cost of equity
after the repurchase?

WACC = 18 %

Cost of Equity (Re)= Ra + (Ra - Rd) d/e

where
Re  =  Return on Equity/ Cost of Equity
Ra     Return on Assets/ WACC
Rd     Cost of Debt
d/e =  Debt-to-Equity Ratio
                   
                   = 18 + (18 - 10) 400000/ 2x10^6
 
                   = 19.6 %

Regards,
Mohamed El-Kamony
3-1-2006