Sharaf Company is financed entirely by common stock that is priced to offer a 15 percent expected return. If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 6 percent,

a) (3 Points) What is the expected return on the common stock after refinancing? (Ignore taxes).

b) (2 Points) Why does MM Proposition I not hold in the presence of corporate taxes?