A Firm Has an Expected Return on Equity of 16

A firm has an expected return on equity of 16% and an after-tax cost of debt of 8%.What debt-equity ratio should be used in order to keep the WACC at 12%?

A) .50
B) .75
C) 1.00
D) 1.50 Let x = debt/asset ratio.Then
) 12 = .08x + (1-x) .16
= ) 08x + .16 - .16x
) 08x/.08 = .04/.08
X = .50