xpected return on assets =( proportion in debt expected return on debt ) + (proportion in equity expected return on equity) rA=(D+EDrD)+(D+EErE) A=portfolio=DVD+EVE - You have a company with no debt and an expected return of 12%. The company has book value of equity of $100MM and market value of $200MM. - You decide to take on 25% debt as part of your capital structure (buying back stock with the new debt). The debt has an interest rate of 5%. - How much debt is the company taking on? - What is the new expected return on equity? - If the old beta of the asset was 1.5, what is the new beta of equity after adding leverage? (assume beta of debt is 0 ). - If the old beta of the asset was 1.5, what is the new beta of equity after adding leverage? (assume beta of debt is .1)