(Answered) Leverage and cost of capital - the common stock and debt of

Management Studies

Leverage and Cost of Capital - The Common Stock and debt of Northern Sludge are valued at $70M and $30M, respectively. Investors currently require a 16% return on the common stock and 8% return on debt. If Northern Sludge issues an additional $10 M of common 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 risk of the debt and that there are no taxes.

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