Virtual Excursions, Pty is financed 80% by common stock and 20% by bonds. The expected return on the common stock is 12%, and the rate of interest on the bond is 6%. The bonds are default-free and...

Virtual Excursions, Pty
is financed 80% by common stock and 20% by bonds. The expected return on the common stock is 12%, and the rate of interest on the bond is 6%. The bonds are default-free and that there are no taxes.

Assume that the company issues more debt and uses the proceeds to retire equity. The new financing mix is 60% equity and 40% debt. If the debt is default-free.

a) What will be the expected rate of return on equity?

b) What will be the expected return on the package of common stocks and bonds?