Leverage and Cost of Capital - Hubbards Pet Foods is financed by 80% by common stock and 20% by bonds. The expected return on the common stock is 12%, and the rate of interest on the bonds is 6% Assume that the bonds are default free and that there are no taxes. Now assume that Hubbards issues more debt and uses the proceeds to retire equity. The new financing mix is 60% equity and 40% debt. If the debt is still default free, what happens to the following?
A) Expected rate of return on equity
B) Expected return on the package of common stock and bonds