Consider the following equation: r_wacc = r_E + r_D(1 - τ_c) The term r_E in this equation is A) the after-tax required rate of return on debt. B) the required rate of return on debt. C) the required rate of return on equity. D) the dollar amount of equity.

Question

Quizplus · Accepted Answer

r_E refers to the required rate of return on equity. This can be seen from the fact that the equation involves both equity and debt, and the other terms in the equation (wacc, tax rate, etc.) are all related to the cost of capital or the financing mix. Therefore, the term r_E must pertain to the cost of equity, which is the required rate of return that investors demand in order to invest in the equity of the company.

Consider the Following Equation: Rwacc = RE

Consider the Following Equation: R_wacc = R_E