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8 ubbard's Pet Foods is financed 90% by common stock and 10% by bonds. The expected return on the common stock 1s 12.7%, and he

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8

ubbard's Pet Foods is financed 90% by common stock and 10% by bonds. The expected return on the common stock 1s 12.7%, and he rate of interest on the bonds is 7.9%. Assume that the bonds are default-free and that there are no taxes. Now assume that fubbard's issues more debt and uses the proceeds to retire equity. The new financing mix is 54% equity and 46% clebt. Assume the lebt is still default free. a. Given the initial capital structure, calculate the expected return on equity. Note: Do not round Intermedlate calculations. Enter your answer as a percent rounded to 1 decimal place. b. Given the revised capital structure, calculate the expected rate of return an equity. Note: Do not round Intermedlate calculatlons. Enter your answer as a percent rounded to 2 decimal places

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