The common stock and debt of Southern Manufacturing are valued at $40 million and $40 million,...

The common stock and debt of Southern Manufacturing are valued at $40 million and $40 million, respectively. Investors currently require a 15% return on the common stock and an 9% return on the debt. Suppose Southern Manufacturing issues an additional $20 million of common stock and uses this money to retire debt. Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes.
What is the expected return on the stock after the change in capital structure ?
What is the weighted average cost of capital after the change in capital structure ?

Expert Solution

jeff jeffy answered 5 days ago

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