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A) A firm currently has a capital structure with 40 % debt. The debt, which...

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Finance

A) A firm currently has a capital structure with 40 % debt. The debt, which is virtually riskless, pays an interest rate of 6 %. The expected rate of return on the equity 13 %. What would happen to the expected rate of return on equity if the firm changed its capital structure to 35 % debt? Assume the firm pays no taxes, the cost of debt does not change, and that the initial WACC is 10.20 %. Enter your anwer as a percentage rounded to two decimal places. Do not include the percentage sign as part of your answer.

B) The common stock and debt of Windows Phone Corp. are valued at $71 million and $27 million, respectively. Investors currently require a 15% return on the common stock and a 5% return on the debt. There are no taxes. If Windows Phone Corp. issues an additional $13 million of debt and uses this money to retire common stock, what will be the expected return on the stock? Recall that the WACC under the inital capital structure is 12.24. Assume that the change in capital structure does not affect the risk of the debt. Enter your answer as a percentage rounded to two decimal places. Do not include the percentage sign in your answer.

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