Leverage and the Cost of Capital. A firm currently has a debt-equity ratio of 1/2. The debt, which is virtually riskless, pays an interest rate of 6%. The expected rate of return on the equity is 12%....

Leverage and the Cost of Capital. A firm currently has a debt-equity ratio of 1/2. The debt,
which is virtually riskless, pays an interest rate of 6%. The expected rate of return on the equity
is 12%. What would be the expected rate of return on equity if the firm reduced its debt-equity
ratio to 1/3? Assume the firm pays no taxes. (LO16-1)