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problem: The common stock and debt of Northern Sludge are valued at USD 70 million and USD 30 million, respectively. Investors currently require a sixteen percent return on the common stock and an eight percent return on the debt. If Northern Sludge issues an additional USD ten million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Suppose that the change in capital structure does not affect the risk of the debt and that there are no taxes.

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