Smith, Inc. is financed entirely by common stock, which is priced to offer an 18% expected return. There are no taxes or financial distress costs.

1. If Smith Inc. repurchases 40% of the common and substitutes an equal amount of bond yielding 8%, what is the expected return on the common stock after refinancing?

2. Suppose that before the refinancing, the stock price is $60 and that earnings per share are expected to be $10.8. What are expected earnings per share after refinancing?

3. Suppose that before the refinancing, an investor held 100 share of common stock. What should she do if she wishes to ensure that the risk and expected return on her investment are unaffected by the refinancing.