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The common stock and debt of Adam's House Inc. are valued at $50 million and $30 million, respectively. Investors currently require a 16% return on
The common stock and debt of Adam's House Inc. are valued at $50 million and $30 million, respectively. Investors currently require a 16% return on the common stock and 8% return on debt. If Northern Sludge issues an additional $10 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that MM-2 proposition is true. Also, assume no taxes.
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