What is the expected rate of return to equityholders if the firm has a 35% tax rate,a 10% rate of interest paid on debt,a 15% WACC,and a 60% debt-asset ratio?
A) 12.50%
B) 21.25%
C) 22.50%
D) 27.75%

Question

Quizplus · Accepted Answer

The expected rate of return to equityholders can be calculated using the formula for the weighted average cost of capital (WACC): WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc). Given WACC = 15%, Rd = 10%, Tc = 35%, and D/V = 60%, we can solve for Re (return on equity). Solving the equation gives Re = 27.75%.

What Is the Expected Rate of Return to Equityholders If