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Additionally, here is a similar example. Follow this format.

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? 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? 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? The expected return is \%. (Round to two decimal places.) The expected return is \%. (Round to two decimal places.) A. True, because this would also lead to the highest earnings per share. B. True, because the manager's argument is correct. C. True, because this will result in a higher market value for the stock. D. False, because returns are higher because risk is higher and the return fairly compensates for the risk. 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 7%. What will be the expected return of equity after this transaction? 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? 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 7%. What will be the expected return of equity after this transaction? To compute the expected return of equity, use the following formula: rE=rU+ED(rUrD) where: rErUrDDE=Expectedreturn(costofcapital)ofleveredequity=Expectedreturn(costofcapital)ofunleveredequity=Expectedreturnondebt=Marketvalueofdebt=Marketvalueofleveredequity Using the formula above, the equation is: rE=17.25%+0.50(17.25%7%)=22.38% The expected return is 22.38%. Using the formula above, the equation is: rE=17.25%+1.50(17.25%9%)=29.63% The expected return is 29.63%. 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? False, because returns are higher because risk is higher and the return fairly compensates for the risk. 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? 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? 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? The expected return is \%. (Round to two decimal places.) The expected return is \%. (Round to two decimal places.) A. True, because this would also lead to the highest earnings per share. B. True, because the manager's argument is correct. C. True, because this will result in a higher market value for the stock. D. False, because returns are higher because risk is higher and the return fairly compensates for the risk. 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 7%. What will be the expected return of equity after this transaction? 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? 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 7%. What will be the expected return of equity after this transaction? To compute the expected return of equity, use the following formula: rE=rU+ED(rUrD) where: rErUrDDE=Expectedreturn(costofcapital)ofleveredequity=Expectedreturn(costofcapital)ofunleveredequity=Expectedreturnondebt=Marketvalueofdebt=Marketvalueofleveredequity Using the formula above, the equation is: rE=17.25%+0.50(17.25%7%)=22.38% The expected return is 22.38%. Using the formula above, the equation is: rE=17.25%+1.50(17.25%9%)=29.63% The expected return is 29.63%. 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? False, because returns are higher because risk is higher and the return fairly compensates for the risk