Problem 17-6 Leverage and the cost of capital

Macbeth Spot Removers is entirely equity financed. Use the following information.

Data Number of

shares 2,300

Price per share $36

Market value of shares $82,800

Expected operating income $12,420

Return on assets 15%

Macbeth now decides to issue $41,400 of debt and to use the proceeds to repurchase stock. Suppose that Ms. Macbeth's investment bankers have informed her that since the new issue of debt is risky, debtholders will demand a return of 11.2%, which is 2.8% above the risk-free interest rate.

a.What arer_Aandr_Eafter the debt issue?(Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Return on assets%

Return on equity%

b.Suppose that the beta of the unlevered stock was .60. What will _A, _E, and _Dbe after the change to the capital structure?(Do not round intermediate calculations. Round your answers to 2 decimal places.)

Asset beta

Debt beta

Equity beta