Question: Determine the expected return on equity for a firm with a WACC of 12%, $500,000 in 9% debt, and $800,000 in equity. Both debt and

Determine the expected return on equity for a firm with a WACC of 12%, $500,000 in 9% debt, and $800,000 in equity. Both debt and equity are shown at market values, and the firm pays no taxes. How can the expected return on equity be reduced?

Answer: 13.88%; Expected return on equity can be reduced by reducing the amount of debt and increasing the amount of equity in the firm

How 13.88% was calculated?

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