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Northern Sludge - Capital Structure

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The common stock and debt of Northern Sludge are valued at $50 million and $30 million, respectively. Investors currently require a 16% return on the common stock and an 8% return on the debt. If Northern Sludge issues an additional $10 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes.

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Solution Summary

Step by step calculations have been presented. All steps to get the Re value have been shown.

Solution Preview

E = $ 50 million
D = $ 30 million
Re = 16%
Rd = ...

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