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Assume there are no taxes and bankruptcy costs. Firm ABC is an all equity firm with cost of capital r=10% and total firm value $100
Assume there are no taxes and bankruptcy costs. Firm ABC is an all equity firm with cost of capital r=10% and total firm value $100 million. The number of total shares outstanding is 1 million. Now it decides to issue riskless debt at risk-free rate of 5% to buy back half of its outstanding shares.
What is its cost of capital for equity before debt issuance and share buy-back?
What its cost of capital for equity after the debt issuance and share buyback?
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