Question:
Hubbard’s Pet Foods is financed 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%. Assuming that the bonds are default- risk- free, draw a graph that shows the expected return of Hubbard’s common stock ( r E ) and the expected return on the package of common stock and bonds ( r A ) for different debt– equity ratios.