Question

The common stock and debt of Chen Inc are valued at $75 million and $25

million, respectively. Investors currently require a return of 16.1% on the common stock and a return of 7.6% on the debt. If Northern Sludge issues an additional $12 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 whole percent.)

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