Bob Ltd. is currently an all equity firm with an expected return of 15%. It is considering borrowing money to buy back some of its issued shares, therefore increasing leverage.

Assume Bob Ltd. borrows to the point that its debt-equity ratio is 0.30. Given that the cost of debt capital is 6%, what is the expected return on equity after this transaction?

What if Bob Ltd. borrows to a point that its debt-equity ratio is 1.00? With this amount of debt, Bobs debt will be riskier and as a result, the debt cost of capital will be 9%. What will be the expected return on equity in this case?