Look back to Section 17.1 . Suppose that Ms. Macbeths investment bankers have informed her that since
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Look back to Section 17.1 . Suppose that Ms. Macbeth’s investment bankers have informed her that since the new issue of debt is risky, debtholders will demand a return of 12.5%, which is 2.5% above the risk-free interest rate.
a. What are r A and r E ?
b. Suppose that the beta of the unlevered stock was .6. What will A , E , and D be after the change to the capital structure?
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