Homework Answers
Given, current cost of capital= 6.6%
WACC= We*Re + Wd*Rd
Where We= Weight of equity, Re= Required rate of return on equity, Wd= Weight of debt and Rd= Cost of debt
Given that proposed DER= 1.3
Therefore, Wd= 1.3/(1+1.3)= 1.3/2.3 and We= 1/2.3
Also given, Rd= 5.4%
Therefore,
(1.3/2.3)*0.054 + (1/2.3)*Re = 0.066
0.030521739 + 0.434782609Re = 0.066
Return on equity (Re) = (0.066-0.030521739)/ 0.434782609 = 0.0816 Or, 8.16
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