Virtual Excursions, Pty 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 bond is 6%. The bonds are default-free and that there are no taxes. Assume that the company issues more debt and uses the proceeds to retire equity. The new financing mix is 60% equity and 40% debt. If the debt is default-free. a) What will be the expected rate of return on equity? b) What will be the expected return on the package of common stocks and bonds?

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
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Virtual Excursions, Pty 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 bond is 6%. The bonds are default-free and that there are no taxes.

Assume that the company issues more debt and uses the proceeds to retire equity. The new financing mix is 60% equity and 40% debt. If the debt is default-free.

a) What will be the expected rate of return on equity?

b) What will be the expected return on the package of common stocks and bonds? 

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