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Expected return on the package of common stock

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Nevero is financed 100% by common stock. The expected return on the common stock ( ) is 15%. There are no taxes.

a. Compute the expected return on the package of common stock and bonds ( ).

b. Now suppose that Nevero repurchases shares and issues debt (bonds), so that / =0.20. The cost of debt ( ) is 5%. Compute and .

c. What is the market value of the firm (equity plus debt) after the change in capital structure? Justify your answer according to the Modigliani and Miller's theory.

Reference no: EM132746851

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