Again, I am taking an online Finance class and I do not understand the
concept of debt and the cost of equity and how this leverage helps a
company.  Can someone please explain how this works with the following
problem.  I am so lost!! If a firm currently has a debt-equity ratio
of 1/2.  The debt, which is virtually riskless, pays an interest rate
of 6 percent.  The expected rate of return on the equity is 12
percent.  What would happen to the expected rate of return on equity
if the firm reduced its debt-equity ratio to 1/3?  Assume the firm
pays no taxes. I have googled as much as I can searching on
debt/equity ratios and such.  It is the concept that I am having
trouble with.  Any help would be great.

Mammabear --

Let me suggest searching Google Answers alone because Livioflores,
myself and several other researchers have answered dozens of questions
on capital structure.  Here's a good one discussing the
Modigliani-Miller theorem that applies to your case:
http://answers.google.com/answers/threadview?id=566671

And here's one with a little humor that may help reinforce M&M:
http://answers.google.com/answers/threadview?id=566672

The pizza image should substantially reduce your lostness.

Best regards,

Omnivorous-GA