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Determine PGs weighted average cost of capital

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Question - Prokter and Gramble (PG) has historically maintained a debt-to-equity ratio (D/E) of approximately 0.4. Its return on 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 0.6, it believes its borrowing costs will rise only slightly to 4.6%.

Determine PG's current asset return rA (before recapitalization).

Determine PG's weighted average cost of capital after PG raises its debt-to-equity ratio to 0.6.

Reference no: EM132819587

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