Solution :-
(a) As it is all equity firm so WACC is equal to ke ( Cost of Equity )
WACC = ke = Rf + Beta (Rm - Rf) = 2% + 0.6 (14% - 2%) = 9.2%.
(b) Total Value of Equity = 1000000 shares @40 per share = $40,000,000
Sales Proceeds from bonds = $20,000,000
Now the Shares Buyback with $20,000,000 = $20,000,000 / 40 = 500,000 Shares
Now Market Value of Debt after the bond sale = $20,000,000
(c) Market Value of Equity after the bond sale = ( 1,000,000 - 500,000 )* $40 = $20,000,000
(D) Now Weight for equity in capital structure = Equity / (debt + Eqity) =
= $20,000,000 / ($20,000,000 + $20,000,000)
= 0.50 = 50%
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