Determine the Expected Return on Equity for a Firm with a WACC

question 64

Essay

Determine the expected return on equity for a firm with a WACC of 12%, $500,000 in 9% debt, $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?

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Definitions:

Normal Profits

The level of profit necessary to keep a firm in an industry, equating to the opportunity cost of capital and entrepreneurship.

Marginal Cost

The financial commitment needed for producing an extra unit of a good or service.

Marginal Revenue

The addition to total revenue resulting from the sale of one more unit of a product or service.

ATC

Average Total Cost; the total cost of production (fixed and variable costs combined) divided by the number of units produced.