Question 2 Whispering Pines, Inc. is all-equity financed. The expected return on the companys shares is 12.5 percent, the risk-free rate is 5 percent, the risk premium is 10%, and the corporate tax rate is 33 1/3 percent.

a) What is the return on assets for Whispering Pines?

b) Suppose the company issues debt, repurchases shares, and moves to a 40% debt ratio (D/(D+E) = 40%). The companys cost of debt at this debt ratio is 8%. What will be the companys weighted average cost of capital at the new capital structure?