Problem
Merrick Inc has shares and debt valued at $50 million and $30 million, respectively. Investors currently require a 16% return on the shares and an '36 return on the debt.
If Merrick issues an additional $10 million shares and uses this money to retire debt, what is the new expected return on the stock? Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes.