2. The Longheel Press produces memo pads in its local shop. The company can rent its equipment and hire workers at competitive rates. Equipment needed for this operation can be rented at $90 per hour, and labor can be hired at $30 per worker hour. The company has allocated $300,000 for the initial run of memo pads. The production function using available technology can be expressed as:

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.