Hubbards Pet Foods is financed 40% by common stock and 60% by bonds. The expected return on the common stock is 11.5%, and the rate of interest on the bonds is 6.5%. Assume that the bonds are default-free and that there are no taxes. Now assume that Hubbards issues more debt and uses the proceeds to retire equity. The new financing mix is 32% equity and 68% debt. Assume the debt is still default free.

a. Given the initial capital structure, calculate the expected return on assets.

b. Given the revised capital structure, calculate the expected rate of return on equity.