The common stock and debt of Northern Sludge are valued at $62 million and $38 million, respectively. Investors currently require a return of 16.8% on the common stock and 7.2% on the debt. If Northern Sludge issues an additional $21 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 risk of the debt and that there are no taxes. New Return on Equity?
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