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What happens to the expected return on the package

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Question - Hubbard's Pet Foods is financed 70% by common stock and 30% by bonds. The expected return on the common stock is 14% and the rate of interest on the bonds is 7%. Assume that the bonds are default-free and that there are no taxes. Now assume that Hubbard's issues more debt and uses the proceeds to retire equity. The new financing mix is 25% equity and 75% debt.

If the debt is still default-free, what happens to the expected rate of return on equity?

What happens to the expected return on the package of common stock and bonds?

Reference no: EM133044577

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