JJP Corporation is a publicly traded firm. The market value of its equity is£35,000,000 and its debt £15,000,000. The yield to maturity of the debt is 5%, the equity-holders require a 20% return, and the company pays 30% corporate tax. They have recently decided to repurchase £5,000,000 worth of equity, and finance the repurchase through the issuance of new debt.
a. How will the return on equity be affected by this change? What is the new return on equity of the company?