ugh. My third attempt and still wrong. thank you for your help! etk iny wo mode:
ID: 2393726 • Letter: U
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ugh. My third attempt and still wrong. thank you for your help!
etk iny wo mode: This shows what is correct or incorrect for the work you have completed The common stock and debt of Northern Sludge are valued at $60 million and $40 million, respectively Investors currently require a return of 15.8% on the common stock and a return of79% on the debt lf Northern Sludge issues an additional S15 million of com on stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the interest rate on Northern's debt and that there are no taxes. (Do not round intermediate caiculations. Enter your answer as a whole percent.) 3 Answer is complete but not entirely correct. New return on 27,59 %Explanation / Answer
Expected return on assets is:
rassets = (0.079* 40/100) + (0.158 * 60/100) = 0.1264 = 12.64%
The new return on equity is:
requity = rassets + [D/E (rassets - rdebt)] = 0.1264 + [25/75 (0.1364 - 0.079)] = 0.1455 = 14.55%
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