Hubbard's Pet Foods is financed 60% by common stock and 40% by bonds. The expected return on the common stock is 13.1%, andthe rate of interest on the bonds is 7.7%. Assume that the bonds are default-free and that there are no taxes. Now assume thatHubbard's issues more debt and uses the proceeds to retire equity. The new financing mix is 30% equity and 70% debt. Assume thedebt is still default free.a. Given the initial capital structure, calculate the expected return on equity.Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.Expected rate of return%b. Given the revised capital structure, calculate the expected rate of return on equity.Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.Expected rate of return%

To solve these questions, we can use the Weighted Average Cost of Capital (WACC) and the Cost of…

Answered: Hubbard's Pet Foods is financed 60% by…

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter9: The Cost Of Capital

Section: Chapter Questions

Problem 16P

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