Macbeth Spot Removers is entirely equity financed. Use the following information.
Data
Number of shares 1,000
Price per share $10
Market value of shares $10,000
Expected operating income $1,500
Macbeth now decides to issue $5,000 of debt and to use the proceeds to repurchase stock. Suppose that Ms. Macbeth's investment bankers have informed her that since the new issue of debt is risky, debtholders will demand a return of 12.5%, which is 2.5% above the risk-free interest rate.
Recompute the return of assets (rA) and return on equity (rE)?