Question 1:

The expected rate of return on the common stock of an unlevered firm is 10%. The expected return on debt is 5.5%. According to MM Proposition 2, whats the expected rate of return on the common stock of a levered firm if the market value of debt is $200,000 and the market value of equity is $500,000. Please show all your work in detail and show formulae used as well and keep four decimals. [10 points]