3. Bradd Enterprises is currently an all-equity firm with an expected return of 10.1%.

It is considering a leveraged recapitalisation in which it would borrow and repurchase existing shares. Assume perfect capital markets.

a. Suppose Bradd borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 5%. What will the expected return of equity be after this transaction?

b. Suppose instead Bradd borrows to the point that its debt-equity ratio is 1.50. With this amount of debt, Bradd's debt will be much riskier. As a result, the debt cost of capital will be

7%. What will the expected return of equity be in this case?

c. A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the shares. How would you respond to this argument?

4. Babylon Industries has no debt and a WACC of 9.2%. The average debt-to-value ratio for the software industry is 5.7%. What would its cost of equity be if it took on the average amount of debt for its industry at a cost of debt of 6.4%? The cost of equity is ______% (Round to two decimal places.)