Macbeth now decides to issue $5,000 of debt and to use the proceeds to repurchase stock. Suppose that Ms. Macbeth's investment bankers have informed her that since the new issue of debt is risky, debtholders will demand a return of 12.5%, which is 2.5% above the risk-free interest rate.
Recompute the return of assets (rA) and return on equity (rE)? (Do not round intermediate calculations. Round your answers to 3 decimal places.)
Suppose that the beta of the unlevered stock was .6. New capital structure is 50% debt financed. What will ßA, ßE, and ßD be after the change to the capital structure? (Round your answers to 1 decimal place.)
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