Rayburn Manufacturing, Inc., is currently 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 percent per
annum. Rayburn plans to issue $400,000 in debt and use the proceeds to
repurchase stock.
The cost of debt is 10 percent per annum.
a. After Rayburn repurchases the stock,what will the firm?sweighted
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 Rayburn?s weighted average cost
of capital after the
repurchase. Is this answer consistent with (a)

With no taxes, WACC will remain the same.

Because you are issuing debt, the return n equity will have to be
greater because the debt has priority in liquidation so the equity
interest is more risky.

... but Im not going to do the math for you.