Hubbard's Pet Foods is financed 60% by common stock and 40% by bonds. The expected return on the common stock is 13.1%, and the rate of interest on the bonds is 7.7%. Assume that the bonds are default-free and that there are no taxes. Now assume that Hubbard's issues more debt and uses the proceeds to retire equity. The new financing mix is 30% equity and 70% debt. Assume the debt 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 %
Hubbard's Pet Foods is financed 60% by common stock and 40% by bonds. The expected return on the common stock is 13.1%, and the rate of interest on the bonds is 7.7%. Assume that the bonds are default-free and that there are no taxes. Now assume that Hubbard's issues more debt and uses the proceeds to retire equity. The new financing mix is 30% equity and 70% debt. Assume the debt 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 %
Chapter9: The Cost Of Capital
Section: Chapter Questions
Problem 16P
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Transcribed Image Text:Hubbard's Pet Foods is financed 60% by common stock and 40% by bonds. The expected return on the common stock is 13.1%, and
the rate of interest on the bonds is 7.7%. Assume that the bonds are default-free and that there are no taxes. Now assume that
Hubbard's issues more debt and uses the proceeds to retire equity. The new financing mix is 30% equity and 70% debt. Assume the
debt 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
%
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