Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets. a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 6%. What will be the expected return of equity after this transaction? Answer: The expected return is %. (Round to two decimal places.) b. Suppose instead Hardmon borrows to the point that its debt-equity ratio is 1.50. With this amount of debt, Hardmon's debt will be much riskier. As a result, the debt cost of capital will be 8%. What will be the expected return of equity in this case? Answer: The expected return is %. (Round to two decimal places.) 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 stock. How would you respond to this argument? Answer: (Select the best answer from the following. Answer "A", "B", "C", or "D") A. False, because returns are higher because risk is higher and the return fairly compensates for the risk. B. True, because the manager's argument is correct. C. True, because this would also lead to the highest earnings per share. D. True, because this will result in a higher market value for the stock