What is the expected return on equity for firm in the 40 percent tax bracket with a 15 percent expected return on assets that pays 12 percent on its debt,which totals 25 percent of assets?

Question

Quizplus · Accepted Answer

First, we need to calculate the after-tax cost of debt: 
12% * (1 - 0.4) = 7.2% 
Then, we can use the following formula to calculate the expected return on equity: 
Expected Return on Equity = Expected Return on Assets + (Expected Return on Assets - After-Tax Cost of Debt) * (1 - Tax Rate) 
Expected Return on Equity = 15% + (15% - 7.2%) * (1 - 0.4) 
Expected Return on Equity = 15.60% 
Therefore, the answer is choice B, 15.60 percent.

What Is the Expected Return on Equity for Firm in the 40