Apex Ltd. has a tax rate of 30% and the interest rate on debt of 8%. The firm's WACC is 11.36% and debt-asset ratio is 60%. What is the expected rate of return to equity holders?

 

Computation of Expected Rate of Return to Equity Holders:

WACC = Weight of Equity*Cost of Equity + Weight of Debt*Cost of Debt*(1-Tax Rate)

11.36% = 40%*Cost of Equity + 60% * 8%*(1-30%)

11.36% = 40% * Cost of Equity + 3.36%

11.36% - 3.36% = 40% * Cost of Equity

8% = 40% * Cost of Equity

Cost of Equity = 8%/40% = 20%

So, Expected Rate of Return to Equity Holders is 20%