Question: Prokter and Gamble (PG) has historically maintained a debt-to-equity ratio (D/E) of approximately 0.3. Its cost of equity is 7.5% and it can borrow at

  1. Prokter and Gamble (PG) has historically maintained a debt-to-equity ratio (D/E) of approximately 0.3. Its cost of equity is 7.5% and it can borrow at 4.3%. PG's tax rate is 40%. PG believes it can increase debt without any serious risk of distress or other costs. With a higher debt-to-equity ratio of 0.5, it believes its borrowing costs will rise only slightly to 4.6%.

a. Determine PG's current (before increasing its debt-to-equity ratio) Asset return (rA)

b. Determine PG's WACC (rWACC) after PG raises its debt-to-equity ratio to 0.5.

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