Widget Co. currently has no debt and the company's beta is 0.60

If Widget Co.'s management adds $20M of debt to the capital structure, the company's beta will increase to 0.80

The expected market return is 15%

The risk-free rate is 5%

Use the Security Market Line (CAPM) to calculate Widget Co.'s cost of equity before and after the debt is added before filling in the blanks.

1.Assume management chooses NOT to add the debt. For shareholders, this company's business risk is closest to _________ and financial risk is closest to __________.

a) 8% ; 0% b) 11% ; 0% c) 14% ; 0% d) 11% ; 2% e) 14% ; 3%

2.Assume management chooses to add the debt. For shareholders, this company's business risk is closest to _________ and financial risk is closest to __________.

a) 8% ; 2% b) 11% ; 2% c) 11% ; 3% d) 14% ; 2% e) 14% ; 3%