the Cost of Capital. Hubbard’s Pet Foods is financed 80% by common stock and 20% by bonds. The expected return on the common stock is 12%, and the rate of interest on the bonds is 6%. 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 60% equity and 40% debt. If the debt is still default free, what happens to the following? (LO16-1)
the Cost of Capital. Hubbard’s Pet Foods is financed 80% by common stock and 20% by bonds. The expected return on the common stock is 12%, and the rate of interest on the bonds is 6%. 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 60% equity and 40% debt. If the debt is still default free, what happens to the following? (LO16-1)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Leverage and the Cost of Capital. Hubbard’s Pet Foods is financed 80% by common stock and
20% by bonds. The expected return on the common stock is 12%, and the rate of interest on the
bonds is 6%. 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 60% equity and 40% debt. If the debt is still default free, what happens to the following?
(LO16-1)
a. The expected
b. The expected return on the package of common stock and bonds
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