Look back to Section 131 (Table 13.2 on p. 329). Suppose that Ms. Macbeths inves

Look back to Section 131 (Table 13.2 on p. 329). Suppose that Ms. Macbeths investment bankers have informed her that since the new issue of debt is risky debt holders will demand a return of 12.5% which is 2.5% above the risk-free interest rate.a. What are rA and rE?b. Suppose that the beta of the unlevered stock was .6. What will A E and D be after the change to the capital structure?Step 1:Operating income FMarket value of shares FExpected return on debt FNumber of Shares FPrice per share FMarket value of shares- new debt F Tip see sidebar for Table 2Market value of debt FFormula Calculationa. rA T C TIP: see formulas on p. 331rE T CCalculationb. A FE C TIP: calculate E/V and D/V firstD CNumber of shares 500Price per share $10Market value of shares $5000Market value of debt $5000Interest at 10% $500Operating Income 500 1000 1500 2000Interest 500 500 500 2000Equity earnings 0 500 1000 1500Earnings per shares 0 1 2 3Return on shares 0 10 20 30

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