The common stock and debt of Northern Sludge are valued at to m. $50 million and $30 million, respectively. Investors currently require a 16 percent return on the common stock and an 8 percent return on the debt. If Northern Sludge issues an additional $10. million of common stock and uses this money to return debt, what happens to the expected return of the stock? Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes.

Assuming that the return on assets and the cost of debt remains the same, how could the expected return on equity in the previous question be if the tax rate was 25 percent?