The firm SMT is financed only by equity. Its equity (and asset) beta is estimated at 0.4. The risk-free rate is 5% and the expected return of the market portfolio is 10%. The firm does not pay taxes and we assume there are no transaction costs or any arbitrage opportunity.

a) Recall the general formula for the WACC

b) Compute the WACC for SMT

If the company repurchases half of her shares by issuing risk-free debt

c) what is the new expected return for shareholders?

d) What is the new WACC?

e) What is the impact of the operation?