Required Return on Equity calculation

CFA Level II Corporate Finance
#1

I have a problem calculating the required return of capital of an exercise: • cost of capital = 10% • cost of debt = 6% • tax rate = 40% • debt-asset ratio = 50% How do you calculate the required return on equity? I find 6.8% but the answer says 16.4% Thanks in advance for your answer. Source: Elan’s study notes on Corporate Finance p.29

#2

10% WAAC = 6% (1-0.40) (0.50/1.0)+ {1-(0.50/1.0)}*Re

10% - 1.80% = 0.5 * Re

Re = 16.40%

#3

Thanks! So I was mixing up Re and WAAC! I wasn’t concentrating well…