1. The Ricardo Corporation has a WACC of 12%. It can borrow at 8%. Assuming that Ricardo has a target capital structure of 80% equity and 20% debt. [Assume no taxes and bankruptcy costs] I. What is the cost of equity? [Ans. 13%] D/E = 0.20 / 0.80 = 0.25 RE = RA + (RA RD)(D/E) = 12 + (12 - 8)(.25) = 13% II. What is the cost of equity if the target capital structure is 40% equity? [Ans. 18%]