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Hubbard's Pet Foods is financed 6 0 % by common stock and 4 0 % by bonds. The expected return on the common stock is

Hubbard's Pet Foods is financed 60% by common stock and 40% by bonds. The expected return on the common stock is 13.5%, and
the rate of interest on the bonds is 7.5%. Assume that the bonds are default-free and that there are no taxes. Now assume that
Hubbard's issues more debt and uses the proceeds to retire equity. The new financing mix is 30% equity and 70% debt. Assume the
debt is still default free.
a. Given the initial capital structure, calculate the expected return on equity.
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.
Answer is complete but not entirely correct.
b. Given the revised capital structure, calculate the expected rate of return on equity.
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
Answer is complete but not entirely correct.
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