The common stock and debt of Northern Sludge are valued at $58 million and $42 million, respectively. Investors currently require a 16.9% return on the common stock and a/an 6.8% return on the debt. If Northern Sludge issues an additional $22 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 interest rate on Northern’s debt and that there are no taxes. (Do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places.)
The common stock and debt of Northern Sludge are valued at $58 million and $42 million, respectively. Investors currently require a 16.9% return on the common stock and a/an 6.8% return on the debt. If Northern Sludge issues an additional $22 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 interest rate on Northern’s debt and that there are no taxes. (Do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places.)
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter15: Capital Structure Decisions
Section: Chapter Questions
Problem 11P: The Rivoli Company has no debt outstanding, and its financial position is given by the following...
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The common stock and debt of Northern Sludge are valued at $58 million and $42 million, respectively. Investors currently require a 16.9% return on the common stock and a/an 6.8% return on the debt. If Northern Sludge issues an additional $22 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 interest rate on Northern’s debt and that there are no taxes. (Do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places.)
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