Question: As chief financial officer of Magnificent Electronics Corporation (MEC), you are considering a recapitalization plan that would convert MEC from its current all-equity capital structure to one that includes substantial financial leverage. MEC now has 490,000 shares of common stock outstanding, which are selling for $50 each. You expect the firm's annual cash flow, before interest and taxes, to be $2,000,000 for the foreseeable future. The recapitalization proposal is to issue $12,250,000 worth of long-term debt, at an interest rate of 6.0%, and then to use the proceeds to repurchase 245,000 shares of common stock worth $12,250,000.
1. Assuming there are no market frictions such as corporate or personal income taxes, calculate the expected return on equity for MEC shareholders under the current all-equity capital structure. Round your answer to two decimal places
2. Assuming there are no market frictions such as corporate or personal income taxes, calculate the expected return on equity for MEC shareholders under the proposed recapitalization. Round your answer to two decimal places.