Suppose that Ms. Macbeth's investment bankers have informed her that since the new issue of debt is risky, debt-holders will demand a return of 12.5% which is 2.5% above the risk free rate of interest.
What are r(A) and r(E)?
Suppose that the beta of the unleveraged stock was .6. What will B(A), B(E), and B(D) be after the change in capital structure?
The following have been calculated in the solution provided:
Step by step calculations have been provided.