Ricardo Prop II - Question

The Ricardo Corporation pays no taxes. It has a WACC of 12%. It can borrow at 8%. Assuming Ricardo has a target capital structure of 80% equity and 20% debt what is its cost of equity? What is the cost of equity if the target capital structure is 50% equity? Calculate the WACC using your answer to verify that it doesnt change when the capital structure changes.

Ra=12% Re=12+(12-8)*(20/80)=13

Re=12+(12-8)*(50/50)=16

WACC= 0.5*16+0.5*8=12