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Isabella construction and interior design

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Isabella Construction and Interior Design is an all-equity company in Central Michigan. The CFO John Thornton Jr. is considering moving to a capital structure with 25% debt and 75% equity and using the all the newly raised capital to repurchase shares of the common stock. The firm's tax rate is 22%, its current beta is 1.40, and it has 25,000 shares of common stock with a market price of $312 per share. Assume MM propositions hold. a. How many shares of common stock will remain after the repurchase? b. If the risk-free rate is 3.5% and the market risk premium is 8.0%, by how much would the cost of equity for the levered firm increase, compared to the cost of equity of the unlevered firm? c. What will be the change in the WACC, if the company can borrow at 7.25 percent?

Reference no: EM132403021

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