15.2 Acetate, Inc., has common stock with a market value of $20
million and debt with a market
value of $10 million. The cost of the debt is 14 percent. The current
Treasury-bill rate is 8
percent, and the expected market premium is 10 percent. The beta on
Acetate?s equity is 0.9.
a. What is Acetate?s debt-equity ratio?
b. What is the firm?s overall required return?

15.7 Rayburn Manufacturing is currently an all-equity firm. The firm?s
equity is worth $2
million. The cost of that equity is 18 percent. Rayburn pays no taxes.
Rayburn plans to issue $400,000 in debt and to use the proceeds to
repurchase stock.
The cost of debt is 10 percent.
a. After Rayburn repurchases the stock, what will the firm?s overall
cost of capital be?
b. After the repurchase, what will the cost of equity be?
c. Explain your result in (b).

A great new discovery in social theory!
Although the use of internet is leading to a decline in learning,
there is a certain social justice factor:  the rich kids get their
questions answered  - and learn nothing, eventually failing in life;
while the poorer ones have to do their own homework and answer their
exam questions and later get ahead in life.
Good luck!

The value of the firm is 20M. The debt is 10M. That means the equity
is 10M. I think you can find the debt/equity ratio yourself.

Acetate's beta is .9, so its levered return is k_s = 17%. That's based
on the risk-free rate of 8% and the market risk premium of 10%. Go
read up on the Capital Asset Pricing Model.

Rayburn's cost of equity is 18% and the cost of its debt is 10%. Since
it pays no taxes, it doesn't get any tax shield on its debt. It takes
on 400k in new debt, but uses it to buy back shares. So it now has a
debt/value ratio of 1/5 and a equity/value ratio of 4/5. Its WACC will
then be 16.4%.

By Modigliani-Miller, I think the new cost of equity will be 20%. 

I won't give you all the details, but this at least gives you a sanity check.