Milla Enterprises is currently an all$-$equity firm with an expected return of $12\%.$ They are considering a leveraged recapitalization in which they would borrow and repurchase existing shares.

a$.$ Suppose Milla borrows to the point that their debt$-$equity ratio is $0\mathrm{.}50.$ With this amount of debt, their debt cost of capital will be $6\%.$ What will be the expected return of their equity after this transaction?

b$.$ Suppose instead they borrow to the point that their debt$-$equity ratio is $1\mathrm{.}50.$ With this amount of debt, their debt will be much riskier. As a result, their debt cost of capital will be $8\%.$ What will be the expected return of their equity in this case?

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?