The Ricardo Corporation has a weighted average cost of capital (Ignoring taxes) of 12 percent It can…


The Absorb of Equity Capital

The Ricardo Corporation has a weighted mean absorb of chief (Ignoring taxes) of 12 percent It can hypothecate at 8 percent Assuming that Ricardo has a target chief erection 01 80 percent equity and 20 percent obligation. what IS Its absorb of equity? What IS the absorb of equity If the target chief erection IS 50 percent equity? Calculate the WACC. using your answers to substantiate that It IS the corresponding in twain events According 10 M&M Proposition II, the absorb of equity, Rf , IS:

RrRA (A. Ro(D/E)

In the primary event. the obligation-equity connection IS 2/.8 = 25. so the Absorb of the equity is

R, = 12% + (12% - 8%) x .25

= 13%

In the relieve event. substantiate that the obligation-equity connection IS 1 0, so the absorb or equity is 16 percent.