1. XYZ Corp is financed entirely by common stock and has a beta of 1.0. The firm is expected to generate a level, perpetual stream of earnings and dividends. Its cost of equity is 12.50%. The company's stock is currently selling for $50. Now the firm decides to repurchase half of its shares and substitute an equal value of debt. The debt is risk-free, with a 5% interest rate. The company is exempt from corporate income taxes. Assuming Modigliani and Miller are correct, calculate the following items after the refinancing: (a) The cost of equity; (b) The overall cost of capital. 2. The common stock and debt of Northern Star Plc are valued at $50 million and $30 million respectively. Investors currently require a 16% return on the common stock and an 8% return on the debt. If Northern Star issues an additional $10 million of common stock and uses this money to retire the equivalent $10 million of debt, what happens to the expected (required) rate of return on the stock? Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes