Ben buys his $230,000 home and, after the $40,000 down payment, finances the remainder with a simple interest amortized loan. ben can pay at most $1,200 per month for the loan, on which the lender has set an annual rate of 5%, which is compounded monthly.

The common stock and debt of northern sludge are valued at $65 million and $35 million, respectively. investors currently require a return of 15.9% on the common stock and a return of 7.8% on the debt. if northern sludge issues an additional $14 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? assume that the change in capital structure does not affect the interest rate on northern’s debt and that there are no taxes.