Question 4

Hubbard's Pet Foods is financed 50% by common stock and 50% by bonds. The expected return on the common stock is 13.0%, and the rate of interest on the bonds is 7.0%. Assume that the bonds are default-free and that there are no taxes. Now assume that Hubbard's issues more debt and uses the proceeds to retire equity. The new financing mix is 35% equity and 65% debt. Assume the debt is still default free. a. Given the initial capital structure, calculate the expected return on assets. (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) Expected rate of return es b. Given the revised capital structure, calculate the expected rate of return on equity. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Expected rate of return %